What Macaulay duration tells us?

What Macaulay duration tells us?

Macaulay duration is the weighted average of the time to receive the cash flows from a bond. It is measured in units of years. Macaulay duration tells the weighted average time that a bond needs to be held so that the total present value of the cash flows received is equal to the current market price paid for the bond.

What is the Macaulay duration formula?

The Macaulay duration is calculated by multiplying the time period by the periodic coupon payment and dividing the resulting value by 1 plus the periodic yield raised to the time to maturity. Next, the value is calculated for each period and added together. Then the value is divided by the current bond price.

How does YTM affect duration?

Duration is inversely related to the bond’s coupon rate. Duration is inversely related to the bond’s yield to maturity (YTM). Duration can increase or decrease given an increase in the time to maturity (but it usually increases). You can look at this relationship in the upcoming interactive 3D app.

What is the formula for duration?

The formula for the duration is a measure of a bond’s sensitivity to changes in the interest rate, and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.

How do you calculate Macaulay duration in Excel?

The formula used to calculate a bond’s modified duration is the Macaulay duration of the bond divided by 1 plus the bond’s yield to maturity divided by the number of coupon periods per year. In Excel, the formula used to calculate a bond’s modified duration is built into the MDURATION function.

How do I calculate duration in Excel?

Another simple technique to calculate the duration between two times in Excel is using the TEXT function:

1. Calculate hours between two times: =TEXT(B2-A2, “h”)
2. Return hours and minutes between 2 times: =TEXT(B2-A2, “h:mm”)
3. Return hours, minutes and seconds between 2 times: =TEXT(B2-A2, “h:mm:ss”)

How do you interpret Macaulay duration?

Macaulay duration can be viewed as the economic balance point of a group of cash flows. Another way to interpret the statistic is that it is the weighted average number of years that an investor must maintain a position in the bond until the present value of the bond’s cash flows equals the amount paid for the bond.

What is duration in math?

Duration is associated with the slope of the price-yield curve. The absolute value of slope at any point on the price-yield curve is the Macaulay duration times the price of the security, divided by one plus the periodic yield.