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Bond Duration Analysis

Posted by Prashant Shah on February 23, 2011

What is Duration of the bond?

The very first thing to remember is, duration of the bond is not maturity of the bond as both are different.

  • Duration is defined as a weighted average of the maturities of the individual payments
  • It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows
  • It is an important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations
  • Duration is also a point where the investor faces no interest rate risk


Zero coupon Bond: Issued at discount to face value and redeemed at par. Does not pay any interest
Vanilla bond/Straight: A normal interest bearing bond

Macaulay Duration:
The formula usually used to calculate a bond’s basic duration is the Macaulay duration


n = number of cash flows
t = time to maturity
C = cash flow
r = required yield (YTM)
M = maturity (par) value

Alternate Equation:

Lets understand the same with an illustration:

Consider a 12.5% bond with annual coupons, redeemable after 5 years at a premium of 5%. If the current interest rate is 15%, calculate duration of the bond.

Hence Duration of the bond = 375.11/94.11 = 3.99 Years

Remember duration of a zero coupon bond is equal to its maturity.

Duration and Bond Characteristics:


•   The lower the coupon, the higher the duration.
•   The higher the coupon, the lower the duration.
•   The longer the term to maturity, the higher the duration.
•   The shorter the term to maturity, the lower the duration.
•   The smaller the duration, the smaller the price volatility of the bond.
•   The greater the duration, the greater the price volatility of the bond.



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