Duration (redirected from Durational pattern)

Duration

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

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duration

The number of years required to receive the present value of future payments, both interest and principal, from a bond. Duration is determined by calculating the present value of the principal and each coupon and then multiplying each result by the period of time before payment is to occur. The concept of duration is used to relate the sensitivity of bond price changes to changes in interest rates. Also called mean term.

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Duration. In simplified terms, a bond's duration measures the effect that each 1% change in interest rates will have on the bond's market value.

Unlike the maturity date, which tells you when the issuer has promised to repay your principal, duration, which takes the bond's interest payments into account, helps you to evaluate how volatile the bond's price will be over time.

Basically, the longer the duration -- expressed in years -- the more volatile the price. So a 1% change in interest rates will have less effect on the price of a bond with a duration of 2 than it will on the price of a bond with a duration of 5.

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Duration

What Does Duration Mean?

A measure of the price sensitivity (the value of principal) of a fixed-income investment to a change in interest rates; duration is expressed in number of years. Rising interest rates mean falling bond prices, whereas declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest rate risk or reward for bond prices.

Investopedia explains Duration

The duration number is a complicated calculation involving present value, yield, coupon, final maturity, and call features. Fortunately for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information. It is a common misconception among nonprofessional investors that bonds and bond funds are risk-free. They are not. Investors need to be aware of two main risks that can affect a bond's investment value: (1) credit risk (default) and (2) interest rate risk (rate fluctuations). The duration indicator addresses interest rate risk. Short-term, intermediate-term, and long-term bond funds all have different durations or maturities. For example, Vanguard's short-, intermediate,- and long-term bond index funds have durations of around 3 years, 6 years, and 11 years, respectively.

Related Terms:
• Accrual Accounting
• Bond
• Basis Point—BPS
• Modified Duration
• Zero-Coupon Bond