What is Duration

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

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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.

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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
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.

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

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