Duration

Bond duration and maturity are often confused, but the two are actually quite different. The maturity date is the date when an issuer – usually the government or a company – plans to repay the bond. Duration, on the other hand, is the point at which a bond reaches the mid-point of its cash flows.

For example, take a very simple bond that redeems after four years for £100 and pays a coupon of £50 at the end of every year. By the end of year three you will have received £150 in three coupons but still be waiting for the fourth coupon and the £100. So you will have reached the bond’s mid point, making the duration three years. Duration is thus influenced heavily by two factors: the coupon rate on the bond and the number of years remaining until it is redeemed.

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

Merryn

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