What is Bond Duration?
Bond duration is a measure of how sensitive a bond's price is to changes in interest rates. It represents the weighted average time until a bondholder receives all of the bond's cash flows. Duration is expressed in years and is a crucial tool for managing interest rate risk.
Types of Duration
Macaulay Duration
Named after economist Frederick Macaulay, this measures the weighted average time until a bond's cash flows are received. The weights are the present values of each cash flow divided by the bond's price.
Modified Duration
Modified duration adjusts Macaulay duration to estimate how much a bond's price will change for a 1% change in yield. It's calculated by dividing Macaulay duration by (1 + yield/payment frequency).
How to Use This Calculator
- Enter the bond's face value (par value)
- Enter the annual coupon rate as a percentage
- Enter the yield to maturity (YTM)
- Enter the years remaining until maturity
- Select how often coupon payments are made
- Click "Calculate" to see the results
Understanding the Results
- Macaulay Duration: The weighted average time to receive cash flows in years
- Modified Duration: The percentage price change for a 1% yield change
- Bond Price: The present value of all future cash flows
- Price Change Estimate: Shows how much the price would change if yields move up or down by 1%
Key Concepts
- Higher duration means greater price sensitivity to interest rate changes
- Zero-coupon bonds have duration equal to their maturity
- Lower coupon rates lead to higher duration
- Longer maturities typically mean higher duration
