Macaulay Duration1 min read

Duration of a bond is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

A bond’s duration is easily confused with its term or time to maturity because certain types of duration measurements are also calculated in years.

However, a bond’s term is a linear measure of the years until repayment of principal is due; it does not change with the interest rate environment. Duration, on the other hand, is non-linear and accelerates as the time to maturity lessens.

Now, coming to what is Macaulay duration

Macaulay duration finds the present value of a bond’s future coupon payments and maturity value. For Macaulay duration, the greater the duration, the greater the interest-rate risk or reward for bond prices.

Macaulay duration can be calculated manually as follows:

The formula is divided into two parts. The first part is used to find the present value of all future bond cash flows. The second part finds the weighted average time until those cash flows are paid. When both the parts are put together, they tell an investor the weighted average amount of time to receive the bond’s cash flows.