Fixed income instrument

chandniwadhwani92
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Fixed income instrument

Postby chandniwadhwani92 » Tue Oct 07, 2014 3:47 pm

In schweser it is given betwwen coupon dates Maclauy duration of bond decreases with passage of time and goes back significantly at each coupon dates

what does this line means

edupristine
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Fixed income instrument

Postby edupristine » Fri Oct 10, 2014 5:34 am

Macaulay Duration is referred to as the time (in years) until all the designated cash flows of a bond (both interest and principal payments) are received.

Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond. Basically, duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds.

So, for a two-year bond with 4 coupon payments every six months of $50 and a $1000 face value, duration (in years) is

0.5(50/1200) + 1(50/1200)+ 1.5(50/1200)+ 2(50/1200) + 2(1000/1200) = 1.875 years.

So the macaulay duration will keep on decreasing as the payments are being received. On every coupon date, after the payment is recieved, macaulay duration will decrease as now there are less no of payments to be received until maturity of the bond.


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