What is the duration of bonds?

The duration of bonds, in the widest sense, is the time that must go through the problem of the bond. Within this process, increased attention is paid to the actual value of the bond when it moves towards maturity. The calculation of the duration of the value of the binding value is relatively simple, when the interest rate is used, although the determination of the current value of the variable bundle binding at a certain point in the maturation process is not particularly difficult.

The more reversible concept of the duration of the binding concerns all types of bonds is a means of measuring the degree of sensitivity, which the problem of binding shows the movements of interest rates. The duration of the bonds is usually measured in years, with careful attention to the actual value of the binding at any annual interval. In the case of problems with a fixed -rate bond, the collected interest is easily identified by consulting the conditions of the bond problem itself. With a binding that bears variable rate, it is necessary to identify the predominant interest interestVou degree when the current interest payment is due. This change in the value of the bond due to the use of the interest rate is called the duration of the dollar.

For identifying the duration of binding, a number of different formulas are used. One of the more common approaches is known as the duration of Macaulay. This approach, developed by Frederick MacAuley, identified the weighted average maturity associated with the bond problem, provided that weights are discounted cash flows that apply to the current interest period. The idea of ​​MacAuley's approach was to make it much easier to determine the level of risk associated with the bond problem based on a variable level of interest or even the possibility that the bond was called soon.

Investors who prefer a relatively low level of risk problems with bonds can be isolated from possible not to make as much return as C canThey were heard when they took the time to screen the duration of the bonds. This is especially true in situations where the binding is structured in a way that allows the issuer to call the binding early. Given the possible fluctuations of interest rates and how this fluctuation could affect the bond since the release, the investor is in a much better position to see if the purchase of a bond is actually worth time and effort.