Friday, July 09, 2004

Duration

Duration is a measure of the average (cash-weighted) term-to-maturity of a bond. The are two types of duration, Macaulay duration and modified duration. Macaulay duration is useful in immunization, where a portfolio of bonds is constructed to fund a known liability. Modified duration is an extension of Macaulay duration and is a useful measure of the sensitivity of a bond's price (the present value of it's cash flows) to interest rate movements.

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