duration

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concept first developed by Frederick Macaulay in 1938 that measures bond price Volatility by measuring the “length” of a bond. It is a weighted-average term-to-maturity of the bond’s cash flows, the weights being the present value of each cash flow as a percentage of the bond’s full price. A Salomon Smith Barney study compared it to a series of tin cans equally spaced on a seesaw. The size of each can represents the cash flow due, the contents of each can represent the present values of those cash flows, and the intervals between them represent the payment periods. Duration is the distance to the fulcrum that would balance the seesaw. The duration of a zero-coupon security would thus equal its maturity because all the cash flows—all the weights—are at the other end of the seesaw. The greater the duration of a bond, the greater its percentage volatility. In general, duration rises with maturity, falls with the frequency of coupon payments, and falls as the yield rises (the higher yield reduces the present values of the cash flows.) Duration (the term modified duration is used in the strict sense because of modifications to Macaulay’s formulation) as a measure of percentage of volatility is valid only for small changes in yield. For working purposes, duration can be defined as the approximate percentage change in price for a 100-basis-point change in yield. A duration of 5, for example, means the price of the bond will change by approximately 5% for a 100-basis point change in yield.
For larger yield changes, volatility is measured by a concept called convexity . That term derives from the price-yield curve for a normal bond, which is convex. In other words, the price is always falling at a slower rate as the yield increases. The more convexity a bond has, the merrier, because it means the bond’s price will fall more slowly and rise more quickly on a given movement in general interest rate levels. As with duration, convexity on straight bonds increases with lower coupon, lower yield, and longer maturity. Convexity measures the rate of change of duration, and for an option-free bond it is always positive because changes in yield do not affect cash flows.
When a bond has a call option, however, cash flows are affected. In that case, duration gets smaller as yield decreases, resulting in negative convexity. When the durations of the assets and the liabilities of a portfolio, say that of a pension fund, are the same, the portfolio is inherently protected against interest-rate changes and you have what is called immunization . The high volatility and interest rates in the early 1980s caused institutional investors to use duration and convexity as tools in immunizing their portfolios.

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noun

1. Uninterrupted existence or succession: continuance, continuation, continuity, continuum, endurance, persistence, persistency. See continue/stop/pause.
2. A limited or specific period of time during which something happens, lasts, or extends: span, stretch, term, time. See time.
3. The period during which someone or something exists: day (often used in plural), existence, life, lifetime, span, term. See live/die, time.

A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

Investopedia Says:
The duration number is a complicated calculation involving present value, yield, coupon, final maturity and call features. Fortunately for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.

It is a common misconception among non-professional investors that bonds and bond funds are risk free. They are not. Investors need to be aware of two main risks that can affect a bond's investment value: credit risk (default) and interest rate risk (rate fluctuations). The duration indicator addresses the latter issue.

Related Links:
Find out how this measure can help fixed-income investors manage their portfolios. Use Duration And Convexity To Measure Bond Risk
Big-money investors can hedge against bond portfolio losses caused by rate fluctuations. Immunization Inoculates Against Interest Rate Risk
Is interest rate risk greater for long-term bonds than short-term bonds?

IN BRIEF: The period of time during which anything lasts or exists.

Not the intensity but the duration of high feelings makes high men. — Friedrich Nietzsche, German philosopher.

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For a list of words related to duration, see:

• Periods of Time - duration: extent of time during which something takes place

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See words rhyming with "duration."

  See crossword solutions for the clue Duration.

This entry is from Wikipedia, the leading user-contributed encyclopedia. It may not have been reviewed by professional editors (see full disclaimer)

Dansk (Danish)
n. - varighed, forløb

idioms:

• for the duration of    så længe noget varer

Nederlands (Dutch)
duur

Français (French)
n. - durée

idioms:

• for the duration    jusqu'à la fin, jusqu'à la saint-glinglin

Deutsch (German)
n. - Dauer

idioms:

• for the duration    für die Dauer von

Ελληνική (Greek)
n. - διάρκεια

idioms:

• for the duration of    για τη διάρκεια, όσο κρατάει η παρούσα κατάσταση

Italiano (Italian)
durata

idioms:

• for the duration of    per la durata di

Português (Portuguese)
n. - duração (f)

idioms:

• for the duration of    enquanto perdurar

Русский (Russian)
длительность, продолжительность

idioms:

• for the duration of    в течение

Español (Spanish)
n. - duración

idioms:

• for the duration    por la duración de, por espacio de, mientras dure

Svenska (Swedish)
n. - varaktighet

中文（简体）(Chinese (Simplified))
持续时间, 为期

idioms:

• for the duration of    直到事情结束, 长期的

中文（繁體）(Chinese (Traditional))
n. - 持續時間, 為期

idioms:

• for the duration of    直到事情結束, 長期的

한국어 (Korean)
n. - 지속, 지속 기간

日本語 (Japanese)
n. - 持続, 存続, 持続期間, 継続

idioms:

• for the duration of    戦争の終わりまで, 非常に長い間

العربيه (Arabic)
‏(الاسم) مدة, دوام, استمرار‏

עברית (Hebrew)
n. - ‮אורך זמן, משך זמן‬

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