McAuley’s duration Prepared by Korenev Maxim and Khazov Ilya What is duration? Duration is the effective term to maturity of a bond. What is the point of duration? ■ ■ ■ Duration shows a bond's dependence on changes in interest rates, and this is useful when choosing bonds. The higher the duration - longer the investment term If an investor believes that the interest rate will rise, choose bonds with low duration How to find the duration? Reference websites Calculation methods --- Smartlab --- --- Macaulay’s duration --- --- cbonds --- --- Modified duration --- --- rusbonds --- --- Effective duration and offer ----- Duration of the bond portfolio --- QUIK trading terminal Moscow Exchange website --- Duration of the project --- Interest rate risk Coupon size Interest rate risk Time to maturity Interest rate risk Duration allows to to compare the interest rate risks of bonds with different criteria. Calculation of duration (1/2) ■ ■ Add up all future payments, taking into account their due date Divide the result by the market price of the bond, taking into account the accumulated coupon income Calculation of duration (2/2) Example 1: an ordinary bond The price of the bond (trades at par) is 100, the YTM (maturity=3 yrs) is 9%. Year Cashflow Price = PV (10%) PV / Price Duration = PV / Price*time Example 1: an ordinary bond The calculation of duration of a bond can be shown as a balancing point on the graph McAuley’s duration = 2.76 yrs Example 2: zero-coupon bond Zero-coupon bond that trades at $77.22, 3 yrs to maturity (YTM= 10%) Year Cashflow Price = PV (10%) PV / Price Duration = PV / Price*time Example 2: zero-coupon bond ■ ■ ■ No intermediate funds (coupons) to reinvest at higher rates CB lowers interest rates, the price of it will increase more than that of a coupon bond because of reinvestment Rule: Macaulay duration for all zero-coupon bonds is always equal to the term to maturity. Example 2: zero-coupon bond McAuley’s duration = 3 yrs Thank you for your attetion!
