Duration

Duration is a measure of the length of time between two points in time. It is usually expressed in days, weeks, months, or years.

Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. It is a measure of the average time it takes for the bond’s price to adjust to a change in interest rates. Duration is expressed in years, and is calculated by taking the weighted average of the present values of the bond’s cash flows, with the weights being the present values of the cash flows.

Duration is an important concept for bond investors, as it helps them to understand how their investments will be affected by changes in interest rates. A bond with a longer duration will be more sensitive to changes in interest rates than a bond with a shorter duration. For example, if interest rates rise, a bond with a longer duration will experience a larger decrease in its price than a bond with a shorter duration. Conversely, if interest rates fall, a bond with a longer duration will experience a larger increase in its price than a bond with a shorter duration.

Duration is also an important concept for bond issuers, as it helps them to understand how their bonds will be affected by changes in interest rates. A bond with a longer duration will be more expensive to issue than a bond with a shorter duration, as the issuer will have to pay more in interest payments over the life of the bond.

Duration is also an important concept for bond traders, as it helps them to understand how their trades will be affected by changes in interest rates. A bond with a longer duration will be more volatile than a bond with a shorter duration, as the price of the bond will be more sensitive to changes in interest rates.

In summary, duration is an important concept for bond investors, issuers, and traders, as it helps them to understand how their investments, bonds, and trades will be affected by changes in interest rates. A bond with a longer duration will be more sensitive to changes in interest rates than a bond with a shorter duration, and will be more expensive to issue and more volatile to trade.