Your Free Online Legal Dictionary • Featuring Black’s Law Dictionary, 2nd Ed.

DURATION Definition & Legal Meaning

Definition & Citations:

The average CASH FLOWS of an INTEREST RATE sensitive ASSET or LIABILITY, takings account of YIELD, interest payments, maturity, and CALLABILITY Duration quantifies the change in the price of a security for a small change in yield (e.g., the linear effects of market changes); the greater the duration, the more sensitive the price to changes in yield, the riskier the instrument. Securities with longer maturities or lower coupons have longer durations, which become even longer as yield declines. Duration is commonly used to estimate profit and loss on a bond, quantify INTEREST RATE RISK exposure, and create fixed income DELTA HEDGES. The standard dollar duration calculation for a semiannual pay security is given as: where C is semiannual coupon interest, y is the semiannual yield, n is the number of semiannual periods, and M is the maturity value of the bond (generally PAR VALUE). The same calculation is often expressed as a percentage price change: where P is the price of the bond. Extensions of the duration formula include Macaulay

Disclaimer

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.