terms, and the absolute sensitivity is often referred to as dollar (euro) duration, DV01, BPV, or delta (δ or Δ) risk). V Duration is an approximate measure of a bond's price sensitivity to changes in interest rates. we see that: In other words, for yields expressed continuously compounded. PV01 (present value of an 01) is sometimes used, although PV01 more accurately refers to the value of a one dollar or one basis point annuity.

Not an individual investor? A short-duration strategy is one where a fixed-income or bond investor is focused on buying bonds with a small duration. {\displaystyle y} The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio.

Δ A bond's modified duration converts the Macauley duration into an estimate of how much the bond's price will rise or fall with a 1% change in the yield to maturity. This is an important number if an investor is worried that interest rates will be changing in the short term. 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. The BPV will make sense for the interest rate swap (for which modified duration is not defined) as well as the three bonds. Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates. … A bond’s duration is a measure of the bond’s sensitivity to interest rate changes. Investors need to be aware of two main risks that can affect a bond's investment value: credit risk (default) and interest rate risk (interest rate fluctuations). Weighted Average Life does not discount. r Typically, when interest rates rise, there is a corresponding decline in bond values. In more technical terms, bond duration is measurement of interest rate risk. For every-day use, the equality (or near-equality) of the values for Macaulay and modified duration can be a useful aid to intuition. "Coping with the Risk of Interest-Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies." The second part finds the weighted average time until those cash flows are paid. , not varying by term to payment. t In the second expression the fractional term is the ratio of the cash flow For most practical calculations, the Macaulay duration is calculated using the yield to maturity to calculate the This formula can be used to calculate the VaR of the portfolio by ignoring higher order terms. Typically cubic or higher terms are truncated. Some investors may be subject to federal or state income taxes or the Alternative Minimum Tax (AMT).

Consider a bond with an embedded put option. Dollar duration or DV01 is the change in price in dollars, not in percentage. Weighted Average Life only uses principal.

y Because every bond and bond fund has a duration, those numbers can be a useful tool that you and your financial professional can use to compare bonds and bond funds as you construct and adjust your investment portfolio. {\displaystyle (t_{1},...,t_{n})} ( Similarly, a two-year coupon bond will have Macaulay duration somewhat below 2 years, and modified duration somewhat below 2 years. {\displaystyle i} The passage of time (convergence towards par). The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.