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Duration

Definition

For bonds this is the percentage change in price given a percentage change in yields. Macaulay duration is a different calculation from modified duration. It represents the weighted average maturity of a bond where the weights are the cash flows (coupons and eventual principal repayment) in each period. Modified duration is an adjustment in duration dependent on the level of the yield.

Using the term Duration :

This concept was developed by a Canadian born economist, Frederick Macaulay, in 1938. Macaulay believed, appropriately, that that the duration (sensitivity to interest rates) of a bond is a more appropriate measure of the bond's worth than its time to maturity because duration considers both the repayment of capital at maturity and the size and timing of coupon payments before maturity. The weights under Macaulay duration are the fractions of the bond's price that occur in each time period. This measure is often used by institutional portfolio managers when attempting to immunize a bond portfolio from adverse interest rate moves.

Pay Special Attention To :

Rebalancing must take place often for an effective immunization strategy to work well. Especially if the markets are highly volatile than daily or even intra-daily rebalancing must take place to maintain immunization, if even immunization is truly possible in turbulent markets.

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Related terms

Convexity

'Duration' appears in these other terms:

Key Rate Duration Rate Duration 

'Duration' appears in the definitions of these other terms:

Country Beta Hedging