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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.
 
== See also ==
* [[Convexity]]
* [[Effective duration]]
* [[Fisher-Weil duration]]
* [[Macaulay duration]]
* [[Maturity]]
* [[Modified duration]]

Latest revision as of 09:11, 2 October 2023