what is duration? What does duration mean? Duration is a concept that describes the main time characteristics of cash payment flows (such as bonds and mortgages) that are superior to maturity. Namely: the ratio of the total weighted present value of cash flow to the total present value.
renewal is an indicator of the sensitivity of bond prices to interest rate changes, and it can also be regarded as an indicator of the time required for investors to recover their bond investment funds. The longer the duration, the more sensitive the bond price is to the change of interest rate. Duration and maturity of bonds are different concepts, and maturity also reflects the sensitivity of bonds to interest rate risk to a certain extent. Other things being the same, the longer the maturity, the more sensitive the price is to the change of interest rate. However, because the sensitivity of bond price to interest rate risk is influenced by coupon rate, frequency of interest payment and maturity, maturity alone is not a good indicator of bond sensitivity to interest rate risk.
Duration is an index calculated by integrating various factors that affect the sensitivity of bond prices to interest rate changes. With this concept, the sensitivity of various bonds and bond portfolios to interest rate risk has a simple and directly comparable measure.
calculation method
there are two commonly used calculation methods for bond duration: MacaulayDuration and modifiedduration.
MacaulayDuration Macaulay's duration is in years. For example, both coupon rate and market yields are 8%, and the duration of a 1-year bond with interest paid once every six months is 7.24 years. D represents the duration. For every 1 percentage point change in the market interest rate, the bond price will change by D% (when the interest rate rises, the price will fall; Prices rise when interest rates fall). It can be seen that bonds (or bond portfolios) with longer duration have higher risks. If the interest rate is expected to fall, it is a rational strategy to adjust the bond portfolio to prolong the duration (which can be achieved by increasing the proportion of long-term debt), because once the interest rate really falls, the price of the bond portfolio will increase greatly. Of course, if the judgment is wrong, the price will be heavier.
the duration of a zero-couponbond that does not pay interest before maturity is equal to the term from termtomaturity of the bond. The duration of all bonds with interest paid before maturity is shorter than the number of years from maturity. In addition, all other things being equal, the higher the coupon rate, the shorter the duration of bonds.
Since bonds are paid before maturity (except zero coupon bond), this payment affects the present value of cash flow and the sensitivity of bond prices to interest rates. Duration not only considers the length before maturity, but also considers early payment. Therefore, the duration can be regarded as a measure of the average life of bonds or mortgage loans.
stocks have no duration, and closed-end funds have a duration, that is, when they can continue to exist, and when the duration ends, they will be liquidated. For example, the duration of a fund is January 1, 28, so when this time comes, the fund will sell its stocks, turn them into cash, and distribute them to fund holders after deducting relevant expenses according to the net value. But now closed-end funds generally adopt the method of opening to the outside world.
the warrants that have not been liquidated in actual operation have a certain exercise period, and the transaction will be terminated at the expiration. Therefore, investors should pay attention to and understand the duration of the warrants in time through various channels such as the warrant issuance instructions, listing announcements, and prompt announcements issued by the warrant issuer, so as to avoid the loss caused by not selling the warrants or exercising the rights at the expiration.