imported>Doug Williamson |
imported>Doug Williamson |
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| In finance, duration - strictly defined - is the weighted average timing of all of an instrument’s cashflows, where the weightings are the present values of the cashflows at the current market yield.
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| By formula, Duration = Sum(PVt)/Sum(PV).
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| Duration is widely used as a risk measure of a portfolio of assets or liabilities. It gives a general indication of the sensitivity of an instrument's or a portfolio's market price to small changes in market yield. (Modified duration measures this in a more refined way.)
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| Broadly speaking, the longer the duration, the more sensitive the market price is likely to be to (small) changes in interest rates. Duration is also used as a measure to compare debt securities that have different maturities and yields.
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| More strictly, the duration of an instrument specifies the remaining life of a zero coupon bond with the same value sensitivity (to a very small change in yield). Both can be regarded as equivalent to a single future cash flow after this period of time. If there is uncertainty about the timing or the occurrence of future cashflows - for example a call option on a bond - then the concept and calculation of duration becomes more complex.
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| Not to be confused with ''maturity'', which is different.
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| More loosely, the terms ''duration'' and ''Modified duration'' are often used interchangeably.
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| Obviously this can lead to potential confusion, so it is important to clarify whether duration or modified duration is intended in any particular context.
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| == See also == | | == See also == |
| * [[Convexity]] | | * [[Annual General Meeting]] (AGM) |
| * [[Effective duration]] | | * [[Extraordinary General Meeting]] |
| * [[Fisher-Weil duration]]
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| * [[Macaulay duration]]
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| * [[Maturity]]
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| * [[Modified duration]]
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| [[Category:Financial_products_and_markets]] | | [[Category:Accounting,_tax_and_regulation]] |
| | [[Category:The_business_context]] |
