Macaulay Duration , what does it mean ?

CFA Level I Fixed Income
#1

Hey guys ,

Was studying the macaulay duration and I understood how to calculate but , but I still dont understand what does it represent . for ex : if a bond has a maculay duration of 3.7years , what does it signify ? does it signify the time it takes to recover the initial investment in terms of PV ? or does it represent something else .

Woudl like some help .

Regards,

Hedgefudge

#2

It’s just a weighted-average time to receipt of cash flows. The shorter the Macaulay duration, the more quickly you get your money, and the longer the Macaulay duration, the more slowly you get your money.

It’s related to modified duration, which is (generally) slightly less than Macaulay duration; thus, the Macaulay duration is (generally) slightly higher than the price sensitivity of the bond to changes in YTM.

I wrote an article on various kinds of duration that may be of some help: http://financialexamhelp123.com/macaulay-duration-modified-duration-and-effective-duration/

#3

Thanks a lot magician !!

Finally understood what that stand for .

#4

The fulcrum illustration helped me develop my understanding.

#5

You’re quite welcome.

Good to hear.