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Duration

• Very closely related to the maturity or the life of bonds. When there are multiple cash flows involved, a measure called duration is used to measure the effective life of the cash flow. Duration of a cash flow stream is the weighted average of the maturities of the cash flow stream's components. The weights are the relative sizes of the components. Duration is also a measure of the sensitivity of the cash flow stream to interest rate changes.

• A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

• The weighted average time to maturity of a bond where the weights are the present values of future cash flows. Duration measures the price sensitivity of a bond to changes in interest rates. (See Modified Duration)

• Is computed by using zero coupon equivalencies to discount all the cash flows of a credit instrument. This statistic is a surrogate for the expected life of the security. In general, the term refers to a quantification of a bond as to its yield and price sensitivity. It should be noted that duration is additive. This means that assets, liabilities, swaps, and other credit instruments can be added to arrive at a portfolio or book duration. Some guidelines are:

  • Duration of a zero coupon is its maturity.
  • Duration of a coupon security is less than its maturity.
  • Duration extends with maturity.
  • Duration is inversely related to coupon rate.
  • Duration is inversely related to the market rate.

See Effective Duration, Macaulay Duration, and Option Adjusted Duration.

• A measure of the current maturity of a fixed-income instrument as the weighted average of the time to receipt of the payments thrown off by the instrument; the weights used are the present values of the future payments to be received.

 
 

Follow this link for all the terms related to ratio.

 
 Embedded terms in definition
 Assets
Asset
Average
Bond
Book
Cash flow
Cash
Change
Coupon rate
Coupon
Credit
Current maturity
Discount
Effective duration
Future
Instruments
Interest rate
Interest
Its
Liabilities
Macaulay duration
Market
Maturity
Modified duration
Option adjusted duration
Option
Portfolio
Present value
Security
Time to maturity
Time
Weighted average
Yield
 
 Referenced Terms
 Benchmark: Is the standard to measure, monitor, price or evaluate a security or derivative. The treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. Here, securities are priced in terms of yield pickup relative to a comparable treasury. This comparability is often in terms of maturity though Duration or average life become more meaningful for securities which have option characteristics.The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average Duration of the portfolio's investments.

 Benchmark: Is the standard to measure, monitor, price or evaluate a security or derivative. The treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. Here, securities are priced in terms of yield pickup relative to a comparable treasury. This comparability is often in terms of maturity though Duration or average life become more meaningful for securities which have option characteristics.The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average Duration of the portfolio's investments.

 Bondpar: A system that monitors and evaluates the performance of a fixed-income portfolio, as well as the individual securities held in the portfolio. BONDPAR decomposes the return into those elements beyond the manager's control--such as the interest rate environment and client-imposed Duration policy constraints--and those that the management process contributes to, such as interest rate management, sector/quality allocations, and individual bond selection.

 Buckets: Refer to categories for securities or derivatives. Some buckets refer to maturity classifications, such as, 3, 6, 12 month buckets. There are many other designations as well. The term can also refer to Duration adjusted groups, option adjusted groups, and other predefined categories which represent a dominant, common feature.

 Certificate of deposit: Abbreviated CD. Also called a time deposit, this is a certificate issued by a bank or thrift that indicates a specified sum of money has been deposited. A CD bears a maturity date and a specified interest rate, and can be issued in any denomination. The Duration can be up to five years.A time deposit with a specific maturity evidenced by a certificate. Large-denomination CDs are typically negotiable.A short-term debt security, which can have a maturity period of anything from a few weeks to several years; interest rates are established by market conditions and competitive environment.A CD is a note issued by a bank for a savings deposit that an individual agrees to leave invested in the bank for a certain term. At the end of this term, on the maturity date, the principal may either be paid to the individual or rolled over into another CD. Interest rates on CDs between banks are competitive. Monies deposited into a CD are insured by the bank, thus they are a low-risk investment. Maturities may be as short as a few weeks or as long as several years. Most banks set heavy penalties for premature withdrawal of monies from a CD. Large-denomination CD's are typically negotiable.This is a negotiable instrument. Involves fixed maturity, 2 weeks to 8 years. Face values under $100,000. The interest rates are competitive with T-Bill rates. Early withdrawals are subject to significant penalty. Holder must pay state and local taxes (unlike T-Bills). Explicitly covered by the deposit insurance.

 
 Related Terms
 Dollar duration
Duration gap
Duration mismatch
Effective duration
Macaulay duration
Modified duration
Mortgage duration
Negative duration
Option adjusted duration

<< Dupont system of financial control Duration gap >>

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