Duration - Monroe 3180 User Manual

DURATION

Duration is a measure of the timing of the cash flow (i.e., the interest payments and the principal
repayment) to be received from a given coupon security. The duration of the security is equal to (a) the
sum of the present values of each of the cash flows weighted by the time to receipt of each cash flow
divided by (b) the total of the present values of the cash flows. The duration of a bond is used by many
investors because it is a convenient way of combing the time elements of a security for coupons and term
to maturity.
The modified duration is the duration (computed as above) divided by ( 1 +Yield/coupons per year).
TRADER II will compute the duration for any coupon security (Codes 0, 1 and 6).
EXAMPLE: A 7.5% Municipal Bond maturing on November 9, 1989 is sold to yield 8%. Find the
dollar price and duration of the security.
ENTER
0
6.2487
Set the FED/MUNI switch and status line as follows:
FED/MUNI SWITCH to MUNI
ENTER
7.5
11.0989
8
Here's some characteristics of Duration:
1. If the bond has coupons, the duration of the bond will always be less than the term.
2. If two bonds have the same maturity date, the bond with a larger coupon will have a shorter
duration.
3. Generally, there is a positive relationship between term to maturity and duration. (Normally the
longer the term to maturity, the longer the duration.)
4. In most cases, the higher the market yield, the lower the duration.
5. Zero or stripped coupon bonds will have a duration equal to the term to maturity.
22
PRESS RESULTS DISPLAYED
CODE Security Code 0.
SETTLEMENT Settlement Date Wed. 06-24-1987
C=0 PER 30/360 SEMI 06-24-87 MATURITY
PRESS RESULTS DISPLAYED
COUPON Coupon Rate 7.500%
MAT Maturity Date Thu.
DATE
END
TO Price 98.923 (M)
PRICE
DUR Duration 2.200 Mod 2.115
MONROE TRADER II
11-09-1989