Bond Duration Formula

Bond Duration Formula

Average Recovery period of investment in bond is technically known is bond duration. For calculating bond duration period of investment is used as weighting and multiplied with return.

Formula for bond duration

Bond Duration =     ∑r x w

                               ∑r

r= return

w= period of return

Bond duration purpose

Bond duration and market price of the bond has close relationship. high duration bond are more price sensitive than low duration bond. High duration bond will take more pressure for a fall in market price of bond.

Example

Year      Return

1                  20

2                  20

3                120

Solution

Year (w)     Return(r)        Return x period (r x w)

1                          20                         20

2                          20                         40

3                        120                       360

Total                 160                       420

= 420/160

= 2.62 Year