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Bond Duration

by Skills.Money
in Blog, Investing
Reading Time: 4 mins read
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Duration is the change in the value of a bond from a % change in interest rates. There are three variations of Duration.

Macaulay Duration

Macaulay Duration, commonly known as Duration, is the time the investor takes to recover an invested money in the bond through coupons and principal repayment. Frederick Macaulay gave this concept. Duration refers to the weighted average time before repayment or when cash flow is received. Duration attempts to measure how long it takes, in years, for an investor to recoup the bond’s price from the bond’s total cash flows. Macaulay Duration can only be extended on instruments with fixed cash flows.

Macaulay Duration=  {C/(1+y)^t}*1 + {C/(1+y)^2}*2 +—– {C+M/(1+y)^n}*n

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