Duration is the average capital commitment period of a financial investment and represents the weighted average of the maturities of the future cash flows assigned to a security or portfolio. But how does it change when the conditions of some relevant variables change?
- With the same residual term and yield-to-maturity, duration is shortened with higher coupons.
- With the same coupon interest rate and yield-to-maturity, the duration of a security is shortened if the coupons are separated more frequently.
- With the same coupon and yield-to-maturity, the duration of a security increases when the maturity is extended.
- With the same other characteristics, the duration of a security decreases if the discount rate increases.
From the financial lexicon:
