Bond duration

Bond duration is often confused with maturity but the two are quite different. The maturity date on a bond determines when it will be bought back by an issuer. Duration, on the other hand, is a measure of how long it will take to reach a bond’s mid point in cash-flow terms. That is the number of years left before the holder has received as many of the bond’s cash flows as are outstanding.

For example, ignoring inflation, take a four-year bond to be redeemed for £100 and paying annual coupons of £50 at the end of every 12 months. Its duration is three years.That’s because by the end of year three you will have received three coupons of £50, but will still be waiting for a final coupon of £50, plus the £100 redemption value.

• See Tim Bennett’s video tutorial: Bond basics.

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