Macaulay Duration - Definition

Macaulay duration is the name given to the weighted average time until cash flows are received, and is measured in years. Modified duration is the name given to the price sensitivity and is the percentage change in price for a Unit change in Yield. When yields are continuously-compounded Macaulay duration and modified duration will be numerically equal. When yields are periodically-compounded Macaulay and modified duration will differ slightly, and in this case there is a simple relation between the two. Modified duration is used more than Macaulay duration.

Created by Frederick Macaulay in 1938, Macaulay duration was not widely used until the 1970s. There are several different types of duration to include: key-Rate, modified, and effective. All measures are expressed in years. The difference is in the way each calculation accounts for changes in interest rates or other embedded options in the bond. Macaulay duration uses a weighted average approach.

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