Can someone explain (in your own words) exactly what duration is?

Question

I am reading it, but having a hard time understanding it.

to clarify i am referirng to Malkiel's Theorems

I am referring to investing duration, not the word "duration".

when I am referring to duration I am NOT referring to the amount of time it takes like if you where talking during a movie I may ask you to stop talking for the duration of the movie (through the whole movie)

I am referring to duration that is similar to pricing bonds. But duration and years to maturity are different why is this?

Answer 1

Since you mentioned "reading about it," I'm assuming that you know that the duration is the weighted average of the cash flows to the bond and that it is a good measure of how drastic (read risky) the price fluctuates based upon a change in interest rates.

Here is an illustration. The cash flows (coupons) go to the investor until maturity. Think of maturity as the "board" on a see-saw. On the other hand, the duration of a bond is the fulcrum of the see-saw upon which the board balances. On side of the see-saw is the prevailing interest rate, on the other side, the bond's price. If the duration is half the maturity, then a 1% rise in interest rates will approximately correspond to a 1% decrease in price.

The most extreme example of duration is a zero-coupon bond. Since there are no cash flows until maturity, duration = maturity.

Answer 2

Duration is related to maturity. A bond pays an interest coupon every six months, until the principal is repaid at maturity. Each of these payments can be thought of as a separate cash flow with it's own maturity. Duration is the weighted average of these maturities (weighted by the amount of each payment). The longer the duration, the more volatile the price of the bond.

Answer 3

Duration is simply interest rate sensitivity. As the interest rates rise, the price of a bond falls... you would have to sell it at a discount to make it competitive with a bond being issued at the currently higher interest rates. As the interest rate falls, the price of a bond rises... you could sell it at a premium because the new bonds don't have the same higher interest rate. Duration is a measure of how much a bonds price will drop if the interest rate changes. Its measured in years, and has something to do with how long you have to hold the bond to get enough coupon payments to make up for the change in price due to a change in interest rates... the technical part I don't understand so much.

Answer 4

To explain the duration of something in the context of what you are asking lets try what is called an analogy, that is, let's try to compare a similar example that would describe "duration".

You have bread and a toaster. You want to make toast . You put the bread in the toaster, push the lever down so that the bread goes down inside the toasted and begins to "toast" (if you look inside thru the top of the toaster you can see that the wires on each side of the bread are glowing red - very hot -. So you wait.

10 seconds go by.

20 seconds go by

60 seconds go by

90 seconds go by

Finally after 2 and 1/2 minutes the "Toasted" bread pops up in the toaster, the Toast is done to a nice golden brown, Perfect!

Now the time that it took for the toaster to "toast" your bread and turn it into"Toast" was 2 1/2 minutes - right?

RIGHT!!

Well then 2 1/2 minutes was the DURATION of the time it takes to make toast from bread in your toaster. Got it? Good Luck.

I'm pulling for you.

Answer 5

The duration of something is how long it takes.

Example: The duration of the movie is 2 hours and 28 minutes.

But I don't have a clue what theorems you're talking about. That's just a generic definition of the word duration.

Answer 6

duration is the amount of time it takes like if you where talking during a movie I may ask you to stop talking for the duration of the movie (through the whole movie)

Answer 7

duration= length of time

Answer 8

During the time its happening