What is Duration

What is Duration - What is Duration? Duration is the...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
What is Duration? 1 Duration is the weighted-average 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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Duration Calculation 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
Background image of page 2
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.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.

Page1 / 13

What is Duration - What is Duration? Duration is the...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online