Bond Duration

Bonds with equal maturities but different coupon rates can be compared on the basis of their respective interest payments. For a given class of bonds, bonds with lower coupons are typically more volatile than those with higher coupons. One method for comparing bonds is the yield to maturity. The bond duration comparison compares the sensitivity to changes in interest rates.

Bond Duration is the average amount of time that it takes to receive the interest and the principal. The duration is a complicated formula (at least it looks that way) that calculates the weighted average of the cash flows (interest and principal payments) of the bond, discounted to the present time.

Who uses the bond duration calculation? This calculation is typically used by pension fund managers when they are planning for cash flows that will be required over time. When using this calculation, you can determine if you will have enough to cover future cash flows.

For those of you who want to know the formula for the index;

Duration = [(1 + a) / a] - [(1 + a) + yrs * (i - a)] / [i * [(1 + a) ^yrs - 1] + i]

Where:

• a = yield to maturity

• i = annual interest (coupon)

• yrs = the number of years to maturity