Context: finance, interest rate
For a fixed interest security such as bonds and debentures, the (Macauley) duration of such a security is the present-value-weighted mean time that a cash flow will be received. It is calculated using the following formula:
D = (Σnt = 0 tCtvt) / (Σnt = 0 Ctvt),
is the final period in which a cash flow is received from the security, Ct
is the cash flow at the time t
, and vt
notation) is the appropriate discount factor for the time period t
Duration is used to measure interest rate risk for a particular security, i.e. the risk of a capital loss if interest rates move adversely. Securities that are sensitive to interest rate movements (and hence more risky) have a greater duration than securities that are less sensitive to interest rates.
Duration, along with its cousins modified duration and convexity, are the guiding principles in immunization of securities.