Bond Funds - Difference between Maturity & Durations


Z

zxcvar

Greetings! What are the differnces between the term "Maturity" and
"Duration" means in bond funds. For example in a bond fund
prospectus,it is stated that maturity of the bonds in the fund - 6.20
years and Duration of the bonds - 4.14 years.
Can some one explain me about these terms. With thanks.
 
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R

Rich Carreiro

Greetings! What are the differnces between the term "Maturity" and
"Duration" means in bond funds. For example in a bond fund
prospectus,it is stated that maturity of the bonds in the fund - 6.20
years and Duration of the bonds - 4.14 years.
Can some one explain me about these terms. With thanks.
For a bond fund, the "maturity" and "duration" numbers
are the average manturity and average duration of the bonds
in the fund (said average presumably being done on a dollar-weighted
basis).

So then the question becomes what the maturity and duration
of an individual bond are.

Maturity is easy -- it's simply the number of years until
a bond matures.

However, that's not the best measure of the "length" of a bond
because it ignores the bond's interest payments. That's where
duration comes in. The duration computation looks at the whole
series of cash flows a bond represents (the interest payments
and the principal payment at maturity) and figures out the
"average" time you receive those payments.

Duration helps you compare bonds with different coupon rates, since a
bond with a higher coupon rate "acts" shorter-term than an otherwise
equivalent bond with a lower coupon rate.

One nice rule of thumb that falls out of the duration calculation is
that the %age change in the price of a bond will be approximately the
duration times the %age change in relevant term interest rates. So if
you have a bond with a 10 year duration and 10-year rates rise by
1.5%, the bond's price will drop by about 15%.

You can read more on duration at
http://invest-faq.com/articles/bonds-duration.html

Also do some googling on "Macauley duration".
 

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