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Definition: Duration

It is found out in case of fixed income securities. It is a relationship between price sensitivity and yield. It is the weighted average maturity of cash flows of a bond. i.e. coupons as well as redemption value.

The duration decreases as the bond approaches its maturity date.  But as soon as the interest is paid, there is a temporary increase in the bond’s duration.

One of the methods of calculation is Macaulay’s duration. It is calculated as follows.


t = respective time period

C = periodic coupon payment

i = periodic yield

n = total number of periods

M = maturity value

P = current bond price

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