| Yield to Maturity (YTM) (%) | 1 |
| Time Weighted Present Value of Coupon payments (A) | 0.14463711368462775 |
| Present Value of Maturity Amount (B) | 5.374721077731093 |
| Duration(A+B)(in yrs.) | 5.51935819141572 |
Meaning that the price of the bond will decrease 5.52 % for a corresponding 1% increase in yield (and vice versa)
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BOND DURATION
A bond’s duration is a powerful risk hedging tool which estimates the increase or decrease in a bond’s price for a corresponding 1% increase or decrease in the yield to maturity. The duration of a bond is calculated as the weighted average time to full recovery of interest and principal payments.
The formula for calculating Frederick Macaulay’s duration of a bond is:
Use of Macaulay Duration
Duration of a bond can be used to measure the interest rate sensitivity and price volatility of a bond vis-a-vis the changes in market yield.
Duration can be used to implement risk hedging strategy. For example, if the investor foresees the yields to fall, he may change his portfolio to include bonds with higher duration. By doing so, he can gain maximum from increase in the bond value.
Similarly if he expects an increase in yield, he might include bonds of lower duration to minimize the negative effect on his portfolio.
