Duration
In this lesson, you'll learn how duration measures bond price sensitivity to interest rate changes and how to apply it in debt analysis.
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In this lesson
- 0:00 Section four duration overview
- 0:04 Macaulay and modified duration explained
- 0:20 Duration calculation step by step
- 0:55 Using duration as discount rate
- 1:01 Duration and bond volatility
- 1:23 Benefits and limitations of duration
- 2:01 Convexity and duration limitations
About this lesson
We cover the Macaulay duration formula—calculating the present value of future cash flows weighted by years to maturity—and the modified duration adjustment used in cost of debt calculations. You'll understand why longer duration bonds are more volatile, how duration helps compare bonds with different coupon rates and maturities, and how to use it for portfolio interest rate risk management. We'll also explore the key limitation: duration assumes a linear relationship between interest rates and bond prices, whereas convexity reveals the true curvilinear relationship, which can introduce measurement inaccuracies when assessing interest rate sensitivity.
Duration: 2m
Transcript
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