Duration

Duration is the point at which a bond reaches the mid-point of its cash flows.

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.

Recommended

Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
21 Sep 2020
Price to sales ratio
Glossary

Price to sales ratio

A company's market cap divided by the company's annual sales (or revenue) gives us the price/sales ratio.
28 Aug 2020
Too embarrassed to ask: what is a p/e ratio?
Too embarrassed to ask

Too embarrassed to ask: what is a p/e ratio?

Find out how to use the price/earnings ratio (p/e ratio for short) – a useful starting place for investors looking to value a company.
26 Aug 2020
Stock split
Glossary

Stock split

A stock split increases the number of a corporation's issued shares by dividing each existing share.
21 Aug 2020

Most Popular

The next 20 years: five new technologies on the horizon
Global Economy

The next 20 years: five new technologies on the horizon

What will everyday life be like in two decades’ time? Matthew Partridge peers into his crystal ball.
12 Nov 2020
This week’s rally in value stocks is just the beginning
Value investing

This week’s rally in value stocks is just the beginning

The arrival of a vaccine this week saw huge gains in the markets and investors switching out of big-tech growth stocks and into “value” stocks in more…
13 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Nov 2020