duration

(noun)

A measure of the sensitivity of the price of a financial asset to changes in interest rates, computed for a simple bond as a weighted average of the maturities of the interest and principal payments associated with it

Related Terms

Examples of duration in the following topics:

  • Duration

    • The dual use of the word "duration" in the Macaulay duration and the modified duration, as both the weighted average time until repayment and as the percentage change in price, often causes confusion.
    • When yields are continuously-compounded the Macaulay duration and the modified duration will be numerically equal.
    • The modified duration is used more than the Macaulay duration.
    • The Macaulay duration and the modified duration are both termed "duration" and have the same (or close to the same) numerical value, but it is important to keep in mind the conceptual distinctions between them.
    • For everyday use, the equality (or near-equality) of the values for the Macaulay duration and the modified duration can be a useful aid to intuition.

  • Disadvantages of the IRR Method

    • IRR can't be used for exclusive projects or those of different durations; IRR may overstate the rate of return.
    • Moreover, since IRR does not consider cost of capital, it should not be used to compare projects of different duration.

  • Calculating Values for Different Durations of Compounding Periods

    • Finding the Effective Annual Rate (EAR) accounts for compounding during the year, and is easily adjusted to different period durations.

  • Zero-Coupon Bonds

    • Zero coupon bonds have a duration equal to the bond's time to maturity, which makes them sensitive to any changes in the interest rates.
    • Pension funds and insurance companies like to own long maturity zero-coupon bonds because of the bonds' high duration.
    • This high duration means that these bonds' prices are particularly sensitive to changes in the interest rate and, therefore, offset or immunize the interest rate risk of these firms' long-term liabilities.

  • The "Bond Yield Plus Risk Premium" Approach

    • It can be very difficult to get an accurate estimate of the risk premium on an equity, having a duration of roughly 50 years, using a risk-free rate of such short duration as a 10-year Treasury bond.

  • Impact of Leasing on the Income Statement

    • Rather, the lease gives the lessee the right to use the assets covered under the agreement for the duration of the contracted term; however, upon the completion of the said term the lessee is required to return the assets in question to the lessor, thereby completing the terms of the agreement.
    • The costs of leases on the income statement depend on the duration and type of lease.
    • In the event of a lease, however, only a portion of the full value is assessed, typically around 50%; the figure varies depending on the duration and type of lease.

  • Dollar Returns

    • If two investments have similar profiles (risk, duration, etc.), than dollar returns is a useful way to compare them.

  • Ranking Investment Proposals

    • An NPV calculated using variable discount rates (if they are known for the duration of the investment) better reflects the situation than one calculated from a constant discount rate for the entire investment duration.

  • Financial Management Before and During Bankruptcy

    • Once confirmed, the plan becomes binding and identifies the treatment of debts and operations of the business for the duration of the plan.

  • Capital Leases vs. Operating Leases

    • The finance company is the legal owner of the asset during duration of the lease.