Explain Macaulay’s Measure of Duration.
Ans. The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates. Macaulay duration can be calculated by:
Where:
t= respective time period
C = periodic coupon payment
y = periodic yeild
n = total number of periods
M = maturity value
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