Can Duration Be More Than Maturity?

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 does Macaulay duration indicate?

The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. Macaulay duration is frequently used by portfolio managers who use an immunization strategy.

Which bond has the longest duration?

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

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.

How is duration different from 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 is duration to worst?

Modified Duration to Worst—Yield change calculated to the priced to worst date; generally used to reflect the behavioral characteristics of a bond as of a specific price/yield and date; consistent with industry calculations, always calculated to the priced to worst date, including all call features.

What is spread to worst?

What is Spread-To-Worst? Spread-to-worst (STW) measures the dispersion of returns between the best and worst performing security in a given market, usually bond markets, or between returns from different markets.

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.

Is high modified duration good?

The modified duration provides a good measurement of a bond’s sensitivity to changes in interest rates. The higher the Macaulay duration of a bond, the higher the resulting modified duration and volatility to interest rate changes.

Is duration always less than maturity?

Duration is expressed in terms of years, but it is not the same thing as a bond’s maturity date. … In the case of a zero-coupon bond, the bond’s remaining time to its maturity date is equal to its duration. When a coupon is added to the bond, however, the bond’s duration number will always be less than the maturity date.

Can effective duration be negative?

Question: I’ve noticed that some bond funds have negative effective durations [a measure of interest-rate sensitivity]. … So if rates go up 1 percentage point a bond with a duration of 5 years would be expected to lose 5% of its value. The longer the duration, the more sensitive the bond is to interest-rate fluctuations.

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 average maturity?

Average Maturity is the weighted average of all the current maturities of the debt securities held in the fund. … Average maturity helps to determine the average time to maturity of all the debt securities held in a portfolio and is calculated in days, months or years.

What is effective duration?

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%.

How does maturity affect duration?

Certain factors can affect a bond’s duration, including: Time to maturity. The longer the maturity, the higher the duration, and the greater the interest rate risk. … A bond that matures faster—say, in one year—would repay its true cost faster than a bond that matures in 10 years.

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.

Why do you think duration would be longer than maturity?

The longer a bond’s maturity, the longer its duration, because it takes more time to receive full payment. The shorter a bond’s maturity, the shorter its duration, because it takes less time to receive full payment. Macaulay Duration is the point where the weights (cash flows) are in balance.

Is Macaulay duration longer than maturity?

Factors that Affect Macaulay Duration With all the other factors constant, a bond with a longer term to maturity assumes a greater Macaulay duration, as it takes a longer period to receive the principal payment at the maturity.