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Duration Financial Glossary

What is it? A sophisticated measure of the average timing of cash flows from an asset or a liability or from an asset portfolio or a liability portfolio. Essentially, duration is a more accurate measure of maturity because it reflects the timing of cash flows from periodic interest and/or principal payments in addition to the cash flows represented by the funds transferred at maturity. Duration is computed by summing the present values of all of the future cash flows after multiplying each by the time until receipt, and then dividing that product by the sum of the present value of the future cash flows without weighting them for the time of receipt. One way to view duration is as the balancing point for a series of cash flows. One author described it as that sweet spot or balancing point somewhere between the day a position is acquired and the day that it matures, where the return remains practically unchanged no matter what happens to interest rates.

Finance Term Definition Added By: Emily

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