CAN YOU GIVE MORE OF AN EXPLANATION OF DURATION? - ProProfs Discuss
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Can you give more of an explanation of duration?



Asked by Elijah, Last updated: Sep 20, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Duration is a mathematical concept whose calculations are not covered in this course.you need to know that duration is a mathematical concept that combines term to maturity and coupon risk together into one value. the value is expressed in years. the higher the value, the more volatile the bonds price movement is in percentage terms when interest rates change.the highest possible duration a bond can have would be equal to the bonds term to maturity. the highest duration is seen in zero coupon bonds where the coupon risk is zero, leading the mathematical expression equal to the bonds term to maturity.duration allows investors to compare bonds in terms of volatility. this is useful because at first glance, its hard to know how one would compare, for example, a 10-year bond with a 7% coupon bond to a 5-year bond with a 4% coupon bond. while the 10-year bond is higher in volatility because of term to maturity risk, its also lower in volatility because of its higher coupon rate. but exactly how can one decide just how volatile it is compared to the other bond? thats what the mathematical concept of duration solves.you will see full examples of how to calculate duration if you sign up for the investment management techniques course.
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