BROWSE

Macaulay Duration

What is The 'Macaulay Duration'

The Macaulay duration is the weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price. Macaulay duration is frequently used by portfolio managers who use an immunization strategy.

Explaining 'Macaulay Duration'

The metric is named after its creator, Frederick Macaulay. The Macaulay duration can be viewed as the 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 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.

Factors Affecting Duration

A bond's price, maturity, coupon and yield to maturity all factor into the calculation of duration. All else equal, as maturity increases, duration increases. As a bond's coupon increases, its duration decreases. As interest rates increase, duration decreases and the bond's sensitivity to further interest rate increases goes down. Also, sinking fund in place, a scheduled prepayment before maturity and call provisions lower a bond's duration.

Example Calculation

The calculation of Macaulay duration is straightforward. Assume there is a bond priced at $1,000 that pays a 6% coupon and matures in three years. Interest rates are at 6%. The bond pays the coupon twice a year, and pays the principal on the final payment. Given this, the following cash flows are expected over the next three years:


Further Reading


Macaulay's duration: An appreciation
www.jstor.org [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

Macaulay's theory of duration: 80-year thematic bibliometric review of the literatureMacaulay's theory of duration: 80-year thematic bibliometric review of the literature
www.emerald.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

Duration gap for financial institutionsDuration gap for financial institutions
www.tandfonline.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

Ranking mutually exclusive projects: The role of durationRanking mutually exclusive projects: The role of duration
www.tandfonline.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

THE COST OF CAPITAL, MACAULAY'S DURATION, AND TOBIN'S THE COST OF CAPITAL, MACAULAY'S DURATION, AND TOBIN'S
onlinelibrary.wiley.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

Does Macaulay duration provide the most cost-effective immunization method–A theoretical approachDoes Macaulay duration provide the most cost-effective immunization method–A theoretical approach
content.sciendo.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

A three-factor yield curve model: non-affine structure, systematic risk sources, and generalized durationA three-factor yield curve model: non-affine structure, systematic risk sources, and generalized duration
papers.ssrn.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

Duration forty years laterDuration forty years later
www.jstor.org [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

The impact of sovereign risk on bond duration: Evidence from Asian sovereign bond marketsThe impact of sovereign risk on bond duration: Evidence from Asian sovereign bond markets
www.sciencedirect.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …

A note on Macaulay's formula for durationA note on Macaulay's formula for duration
papers.ssrn.com [PDF]
… His measure, or measures not substantially different from it, has often been used in economics, finance, and insurance … 9. Paul A. Samuelson, "The Effects of Interest Rate Increases on the Banking System," American Economic Review 35 (March 1945 … 591 Macaulay's Duration …


Leave a Reply

Your email address will not be published. Required fields are marked *