DURATION Function

DURATION( times, flows, ytm ) ;

The DURATION function returns a scalar value that represents the modified duration of a noncontingent cash flow. The arguments are as follows:

times

is an -dimensional column vector of times. The th time corresponds to the time (often in years) until the th cash flow occurs. Elements should be nonnegative.

flows

is an -dimensional column vector of cash flows.

ytm

is the per-period yield-to-maturity of the cash-flow stream. This is a scalar and should be positive.

Duration of a security is generally defined as

     

In other words, it is the relative change in price for a unit change in yield. Since prices move in the opposite direction to yields, the sign change preserves positivity for convenience. With cash flows that are not yield-sensitive and the assumption of parallel shifts to a flat term structure, duration is given by

     

where is the present value, is the per-period effective yield-to-maturity, is the number of cash flows, and the th cash flow is , periods from the present. This measure is referred to as modified duration to differentiate it from the Macaulay duration:

     

This expression also reveals the reason for the name duration, since it is a present-value-weighted average of the duration (that is, timing) of all the cash flows and is hence an "average time-to-maturity" of the bond.

For example, consider the following statements:

times = 1;
flow = 10;
ytm = 0.1;
duration = duration(times, flow, ytm);
print duration;

Figure 23.96 Duration of a Cash Flow
duration
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