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.

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