define bond duration
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- Glossary. 1  Duration: A measure of the sensitivity of the price of a bond to a change in interest rates. 2  Maturity: The number of years left until a bond repays its principal to investors. 3  Yield: The income return or interest received from a bond.  Coupon: The interest payments a bondholder receives until the bond matures.
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Bond duration Bond duration. In finance, the duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received.
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Bond Duration & Convexity Changing the yield from 5% to 6% caused a 12.08% price decline for Bond 1, whereas its duration is 13.47 years. Therefore, the Macaulay duration can be used to estimate the percentage change in the value of a bond for a 1% change in interest rates.
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What is 'Duration' 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. Next Up.
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What is a 'Bond' Loading the player... What is a 'Bond'. A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.
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What is 'Duration' 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.
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Bond duration Macaulay duration is a time measure with units in years, and really makes sense only for an instrument with fixed cash flows. For a standard bond the Macaulay duration will be between 0 and the maturity of the bond. It is equal to the maturity if and only if the bond is a zero-coupon bond.he dual use of the word duration, as both the weighted average time until repayment and as the percentage change in price, often causes confusion. Strictly speaking, Macaulay duration is the name given to the weighted average time until cash flows are received, and is measured in years.
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"The Difference Between ""Maturity"" and ""Duration""" It's this last measure that Morningstar lists on its bond-fund pages, and it is provided by the fund companies themselves. Average effective duration is an asset-weighted measure of the effective duration of securities held in a fund and is particularly useful as a guide to how interest-rate movements will affect the fund's holdings. Simply put, bonds with longer durations are more sensitive to interest-rate changes than those with shorter durations.
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How Does Duration Impact Bond Funds? Bond duration is an investment concept that few average investors truly understand, yet it can have a meaningful impact on how your bond mutual fund or fixed income portfolio performs relative to the bond market as a whole.
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- The duration for the CD of Bank B is calculated above to be 7.001 years. Since the bond is a zero-coupon, the duration is equal to the maturity of 7 years. Using the duration formula to estimate the change in value: Bond: (Value =.
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Evaluating Bond Funds: Keeping It Simple Duration, in the simplest terms, is a measure of a bond fund's sensitivity to interest rate changes. The higher the duration, the more sensitive the fund. For example, a duration of 4.0 means that a 1% interest rate rise causes about a 4% drop in the fund. Duration is considerably more complex than this explanation but when comparing one fund's interest rate risks to another, duration offers a good starting point.
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Updated: DurationâWhat an Interest Rate Hike Could Do to Your Bond Portfolio If a fund’s duration is two years, then a one percent rise in interest rates will result in a two percent decline in the bond fund’s value. A two percent increase in the bond’s fund value would follow if interest rates fall by one percent.
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Bond Duration â How To Calculate Interest Rate Risk For a Bond In the case of a bond with a duration of 8, a 1% rise in market interest rates would cause the bond to decrease in value 8%. Conversely, a 1% fall in interest rate would cause the bond’s value to increase by 8%.ow bond duration changes with time. In a bond that pays interest, an interest payment that is made to an investor is no longer a future cash flow (it’s now already in the investor’s bank account). When such a payment is made, the duration of the bond will change.
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- Short-Term Bond. Short-term bond portfolios invest primarily in corporate and other investment-grade U.S. fixed-income issues and have durations of one to 3.5 years (or, if duration is unavailable, average effective maturities of one to four years).
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Bond Duration â How To Calculate Interest Rate Risk For a Bond However, higher risk means higher potential reward: A bond with higher duration will have larger gains when interest rates fall than a similar bond with a lower duration. The impact of a change in interest rates on a bond’s price, or its interest rate risk, is measured by the bond’s duration.ow bond duration changes with time. In a bond that pays interest, an interest payment that is made to an investor is no longer a future cash flow (it’s now already in the investor’s bank account). When such a payment is made, the duration of the bond will change.
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- Bond duration is a measure of the price sensitivity of a bond to changes in interest rates. In other words, it is a measure of the bond's interest rate risk. Duration tells you approximately what percent change in bond price will result from a given change in yield to maturity.
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- A: Once again, this answer depends on when the bond was issued. We broke down when a bond reaches its original maturity and when it goes into an extension by years. An extension is the term used for the 10 year period after the bond reaches its original maturity. A bond may enter into an additional 10 year extension. However a bond will never earn interest for more than 30 or 40 years (depending on the issue date of the bond).
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Bond Duration â How To Calculate Interest Rate Risk For a Bond If a bond’s duration is 8 (meaning that it will take 8 years for the bondholder to receive back the purchase price of the bond), you can also use that number to calculate how much the price will move if interest rates change.ow bond duration changes with time. In a bond that pays interest, an interest payment that is made to an investor is no longer a future cash flow (it’s now already in the investor’s bank account). When such a payment is made, the duration of the bond will change.
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- Economic Definition of bond. Offline Version: PDF. Term bond Definition: The general term for a long-term loan in which a borrower agrees to pay a lender an interest rate (usually fixed) over the length of the loan and then repay the principal at the date of maturity.
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Bond duration The sensitivity of a portfolio of bonds such as a bond mutual fund to changes in interest rates can also be important. The average duration of the bonds in the portfolio is often reported. The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio.
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Updated: DurationâWhat an Interest Rate Hike Could Do to Your Bond Portfolio A similar investment grade bond with a duration of 14.5 (30-year maturity, 4.5 percent coupon) might experience a loss in value of 26 percent1. The higher level of loss for the longer-term bond happens because its duration number is higher, making it react more dramatically to interest rate changes.
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duration Duration is stated in years. For example, a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%.Duration is a weighted measure of the length of time the bond will pay out.Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond. Basically, duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds.uration is a weighted measure of the length of time the bond will pay out. Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond. Basically, duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds.
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Bond duration The sensitivity of a portfolio of bonds such as a bond mutual fund to changes in interest rates can also be important. The average duration of the bonds in the portfolio is often reported. The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio. If each bond has the same yield to maturity, this equals the weighted average of the portfolio's bond's durations, with weights proportional to the bond prices.
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duration Definition of duration: Period required to complete an activity, job, or task, usually excluding holidays and other non-working days.
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How late payments can affect your credit 1 You'll usually be charged a late fee. 2  If you pay your credit card bill a single day after the due date, you could be charged a late fee in the area of $25 to $35, which will be reflected on your next billing statement. 3  If you continue to miss the due date, you can incur additional late fees.
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Bond duration After all, the modified duration (% change in price) is almost the same number as the Macaulay duration (a kind of weighted average years to maturity). For example, the annuity above has Macaulay duration of 4.8 years and we might think that it is sensitive to the 5-year yield.