How Do You Interpret Macaulay Duration?

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..

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 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%.

Why is duration measured in years?

Duration is measured in years. Generally, the higher the duration of a bond or a bond fund (meaning the longer you need to wait for the payment of coupons and return of principal), the more its price will drop as interest rates rise.

Can duration be more than maturity?

The longer the bond’s maturity, the greater its duration. However, the duration is always a smaller number than the maturity. If a bond has 10 years to maturity, its duration may be six or seven, for example, but it will not be 10.

How do you calculate Macaulay duration in Excel?

The formula used to calculate a bond’s modified duration is the Macaulay duration of the bond divided by 1 plus the bond’s yield to maturity divided by the number of coupon periods per year. In Excel, the formula used to calculate a bond’s modified duration is built into the MDURATION function.

How do you calculate portfolio duration?

Portfolio duration is commonly estimated as the market-value-weighted average of the yield durations of the individual bonds that compose the portfolio. The total market value of the bond portfolio is 170,000 + 850,000 + 180,000 = 1,200,000.

What does the Macaulay duration tell us?

Macaulay duration is the weighted average of the time to receive the cash flows from a bond. … Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond.

How do you interpret duration?

In general, the higher the duration, the more a bond’s price will drop as interest rates rise (and the greater the interest rate risk). As a general rule, for every 1% change in interest rates (increase or decrease), a bond’s price will change approximately 1% in the opposite direction, for every year of duration.

How do you calculate duration of a bond?

The formula for the duration is a measure of a bond’s sensitivity to changes in interest rate and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.

What is difference between duration and 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 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.

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 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.

How do you calculate Macaulay duration?

The Macaulay duration is calculated by multiplying the time period by the periodic coupon payment and dividing the resulting value by 1 plus the periodic yield raised to the time to maturity.

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.

What does duration mean?

1 : continuance in time gradually increase the duration of your workout. 2 : the time during which something exists or lasts were there for the duration of the concert.