Sunday, January 2, 2011


Duration is a measure of a bond's value or price sensitivity to interest rates. Duration is measure in number of years, and predicts bond price movements inversely i.e. bond price change = -D x Rchg , where Rchg is the change in interest rates, and -D is negative 1 times Duration. For example if a bond's duration measure is 2.50 and interest rates decrease by 1.00% then the bond could rise in value by about 2.50% (and vice versa). In terms of its calculation, duration is the weighted average time to receipt of cash flows. Often for bond funds, the fund manager will report the portfolio duration, and make comments about how the portfolio is positioned on duration with respect to their view on the market and economic outlook.

Synonyms: Duration gap, Average duration, Modified duration

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