How to explain duration?

What Is the Purpose of Duration? Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates . In general, the higher the duration, the more a bond's price will drop as interest rates rise (and the greater the interest rate risk).

What do you think duration means?

Duration is how long something lasts, from beginning to end . A duration might be long, such as the duration of a lecture series, or short, as the duration of a party. The noun duration has come to mean the length of time one thing takes to be completed.

What is effective duration?

The effective duration helps calculate the volatility of interest rates in relation to the yield curve and therefore the expected cash flows from the bond . Effective duration calculates the expected price decline of a bond when interest rates rise by 1%.

What is the duration of a term?

TERM, DURATION means the effective period between the commencement date and the end date of this Agreement and the time period that the Customer is licensed to use the Service .

What is an example of duration?

Duration is defined as the length of time that something lasts. When a film lasts for two hours , this is an example of a time when the film has a two hour duration. A measurement of a bond's price sensitivity to changes in interest rates.

What is duration in a sentence?

He was given the task of protecting her for the duration of the trial. Courses are of two years' duration.

What is the meaning of duration and time?

Essentially time is the concept we use to describe change over an area in space (the environment), and duration refers to our observation of that change (or that event) from start to finish .

What is duration and time?

A Duration measures an amount of time using time-based values (seconds, nanoseconds) . A Period uses date-based values (years, months, days). Note: A Duration of one day is exactly 24 hours long.

What does duration mean in reading?

Reading duration refers to the amount of time spent by a reader on reading a particular piece of content . It is a measure of the time taken to complete the reading activity.

Why is duration important?

Duration allows bonds of different maturities and coupon rates to be directly compared . The higher the duration, the higher the risk of price changes as interest rates change.

What are the two types of duration?

[1] Macauley Duration is calculated by summing up all the multiples of the present values of cash flows and corresponding time periods and then dividing the sum by the market bond price. [2] Modified Duration is calculated by dividing the Macaulay Duration by one plus the yield to maturity.

What is duration risk?

Duration risk, also referred to as interest rate risk, is the risk that changes in interest (borrowing) rates may reduce or increase the market value of a fixed-income investment . The interest rate is the cost of borrowing, while bond prices reflect the market value of bonds.

What is the usage of duration?

the length of time that something lasts : a two-year/ten-month/six-week, etc. duration Most placements of agency IT staff are of a three-month or six-month duration. Does the rate only apply for a limited period or for the duration of the loan?

What is the root word for duration?

Quick Summary. The Latin root dur means “hard.” This Latin root is the word origin of a good number of English vocabulary words, including endure, during, and duration.

How do you describe duration in music?

"Duration is the length of time a pitch, or tone, is sounded ." A note may last less than a second, while a symphony may last more than an hour. One of the fundamental features of rhythm, or encompassing rhythm, duration is also central to meter and musical form.

Define Duration (2024)

Define Duration

Philippe Jorion's

Orange County Case:

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Definition

Duration is a characteristic of a bond.For fixed-coupon bonds, duration can be intuitively defined as theaverage maturity of all bondpayments, where each payment is weighted by its value.In the fixed-income market, duration isan essential tool for risk management,as it measures the sensitivity of an asset priceto movements in yields.

To understand the duration concept, consider a bond thatpays $50 in one year and $50 in two years.The maturity of this bond is two years.This, however, only corresponds to the last payment.Using a lever analogy, duration is measured by the distance fromthe fulcrum, which is about one-and-a-half year.(This is, however, a somewhat extreme example.In practice, bonds make coupon payments that are much smaller than theprincipal at the end.)

The reason why duration is so important is that it also measures thesensitivity of the bond price to changes in yields:

Duration and Risk

Duration, or interest rate bets, can be increased either by investing insecurities with longer duration (e.g. 30-year bonds), or by leveragingthe portfolio.

Table 1 below compares measures of duration for bonds withmaturities varying from 1 year to 30 years.Duration is based on 8% par fixed-coupon bonds.We observe that duration is increasing with maturity: the duration of a5-year note is 4.0 years, and that of a 30-year bond is 11.3 years.

Table 1. Maturity and Duration

8% Yield, 8% Coupon Bonds

Maturity	Duration
(Years)	(Years)
1	0.93
2	1.78
3	2.59
5	3.99
7	5.21
10	6.71
30	11.26

Therefore, to increase the duration of a portfolio, a manager can eitherinvest in longer maturity issues, or leverage shorter maturities.Assume for instance that investors put $100 million in a portfolio.This can be used to buy a 5-year note. Next, the note can be pledged ascollateral (in a reverse repo in exchange) for cash.The portfolio manager has the cash but is obligated to purchase back thenote at a fixed price in the future, and therefore is still exposed toprice movements.

In the meantime, the cash can be used to invest in another $100 million5-year note. This process can be repeated a second time, for a totalholding of $300 million. As the initial investment was only $100million, the leverage ratio is 3:1. Therefore, any price movement willbe accentuated by a factor of 3. In other words, the portfolio durationis now

Price Change = - 4 x $300 million x 1/(1+y) x Yield Change
Price Change = - 12 x $100 million x 1/(1+y) x Yield Change.

Relative to the initial $100 million investment, the duration is now of12 years. The risk of the 3:1 leverage portfolio is therefore similarto that of a 30-year bond.<!IMG src = "linr640.gif">

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Contents (c) 1996 - Philippe Jorion