Duration
The duration of a bond is the weighted average maturity of the bond.
where
- Ct is the cash flow in period t
- Pt is the discount factor, the current price of a discount bond paying par at t.
When holding a bond one would like to know how sensitive the value of the bond is to changes in economic environment. The most relevent piece of the economic environment is the current interest rate. An important component of such calculation is the duration of a bond. The duration of a bond should be interpreted as the weighted average maturity of the bond, and is calculated as
Typical Uses
The duration is a component used in the calculation of a bonds sensitivity to changes in the current interest rates.
