Quick Answer: What Is Duration Used For?

What is spread duration?

Spread duration is the sensitivity of the price of a security to changes in its credit spread.

The credit spread is the difference between the yield of a security and the yield of a benchmark rate, such as a cash interest rate or government bond yield..

What does negative duration mean?

A situation in which the price of a bond or other debt security moves in the same direction of interest rates. That is, negative duration occurs when the bond prices go up along with interest rates and vice versa. … Negative duration means that the bank’s equity is negative.

What is Dollar duration?

The dollar duration measures the dollar change in a bond’s value to a change in the market interest rate. The dollar duration is used by professional bond fund managers as a way of approximating the portfolio’s interest rate risk.

What is duration in investment?

Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows. At the same time, duration is a measure of sensitivity of a bond’s or fixed income portfolio’s price to changes in interest rates.

What is difference between duration and maturity?

In plain English, “duration” means “length of time” while “maturity” denotes “the extent to which something is full grown.” When bond investors talk about duration it has a very specific meaning: The sensitivity of a bond’s price to changes in interest rates.

What does the Macaulay duration tell us?

Macaulay duration is the weighted average of the time to receive the cash flows from a bond. … Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond.

What is duration risk?

Duration risk is the name economists give to the risk associated with the sensitivity of a bond’s price to a one percent change in interest rates. The higher a bond’s duration, the greater its sensitivity to interest rates changes.

How is duration calculated?

The Macaulay Duration formula reflects the fact that Duration = Present value of a bond’s cash flows, weighted by the length of time to receipt, and divided by the bond’s current market value.

What is the difference between duration and Macaulay duration?

The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.

What is duration of time?

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.

What is duration control?

[də′rā·shən kən‚trōl] (electronics) Control for adjusting the time duration of reduced gain in a sensitivity-time control circuit.

What is the duration in music?

Duration is the length of time each note is played for. Just like in Beethoven’s Fifth Symphony, notes can be short or they can be long. Tempo is the speed of the music.

Which bond has the longest duration?

zero-coupon bondA zero-coupon bond has the highest duration among the bonds of the same…

What is duration example?

Duration is an approximate measure of a bond’s price sensitivity to changes in interest rates. … For example, a bond with 10 years till maturity and a 7% coupon trading at par to yield 7% has a duration of 7.355 years. At a yield of 6% (price 107 14/32), its duration is 7.461 years.

What is duration in risk management?

Definition. Duration is a characteristic of a bond. … In the fixed-income market, duration is an essential tool for risk management, as it measures the sensitivity of an asset price to movements in yields. To understand the duration concept, consider a bond that pays $50 in one year and $50 in two years.

What is the duration for cash?

Duration is defined as the average time it takes to receive all the cash flows of a bond, weighted by the present value of each of the cash flows. Essentially, it is the payment-weighted point in time at which an investor can expect to recoup his or her original investment.

What is another word for duration?

In this page you can discover 27 synonyms, antonyms, idiomatic expressions, and related words for duration, like: lifetime, longanimity, period, perpetuality, perpetuity, perseverance, run, stretch, time, continuity and longevity.

What does effective duration mean?

Effective duration is a duration calculation for bonds that have embedded options. … The impact on cash flows as interest rates change is measured by effective duration. Effective duration calculates the expected price decline of a bond when interest rates rise by 1%.