Chapter 3

Calculating Duration
Duration is not maturity
• Duration is known as effective maturity.
• Duration is the average lifetime of a debt security’s stream of
payments (or weighted average of the maturities of the cash
payments)
• A coupon bond makes substantial payments before the maturity date.
• A zero coupon bond makes all its payments at maturity.
ISSUANCE
MATURITY
Consider a $1000, 4 year, 10% coupon bond.
0 1 2 3 4

-$1000 100 100 100 1100

• Price: $1000
• Face Value: $1000
• Coupon rate: 10%
 Calculating Duration i =10%,
10-Year 10% Coupon Bond
Table 3.3 Calculating Duration on a $1,000 Ten-Year 10% Coupon Bond
When Its Interest Rate Is 10%

• 
 Calculating Duration i =20%,
10-Year 10% Coupon Bond
Table 3.4 Calculating Duration on a $1,000 Ten-Year 10% Coupon Bond
When Its Interest Rate Is 20%

• 
Formula for Duration

• total PV

• Key facts about duration

1. All else equal, when the maturity of a bond rises, the
duration rises as well.
2. All else equal, when interest rates rise, the duration of a
coupon bond will fall.
3. All else equal, when the coupon rate rises, the duration
decreases.
 Duration and Interest-Rate Risk

initial • ∆P: change in price

• DUR: duration
• ∆i: change in interest
• If for example interest rates increase from 10% to
rates
11%: • iinitial : starting interest
rate