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What is Duration?
1
•
Duration is the weightedaverage time to maturity
on the loan using the relative present values of
the cash flows as weights.
•
It is the point at which the present value of the
cash flows is evenly distributed.
–
Cash flow received before the loan’s duration is
recovery of the initial investment and any cash
flows received after the loan’s duration is profit.
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2
•
Duration analysis weighs the time at which cash
flows are received by the relative importance (in PV
terms) of the cash flows arriving at each point in
time.
•
Back to our example:
$53.49 / $100 = .5349
The first cash flow is 53.49% of the total
cash flows
$46.51 / $100 = .4651
The second cash flow is 46.51% of the
total cash flows
Duration Calculation
3
•
With this information, we can now calculate
duration, or the effective time to maturity:
$53.49 / $100 = .5349
$46.51 / $100 = .4651
1.000
In PV terms, this is the relative importance
of these cash flows arriving at time
t
= ½ and
time
t
= 1.
It is the relative length of time we
have to wait for the cash flows.
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This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.
 Spring '12
 PatriciaRobertson

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