Duration is a measure of the sensitivity of a fixed income security’s price to changes in interest rates.
There are generally two methods of calculating a bond or debt instrument’s duration. The first method of duration calculation is called Macaulay duration, which accounts for the present value of future bond payments and value at maturity. It is the standard by which markets calculate bond pricing. The second method of duration calculation allows an investor to know how much a bond’s price will fluctuate if the yield to maturity rises or falls by one percent.
Duration is ultimately used by investors to quantify credit risks and interest rate risks associated with a given fixed income security.
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