Which duration is measured in years?

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Multiple Choice

Which duration is measured in years?

The main idea is that one duration is a direct measure of time, while the other is a sensitivity tool. Macaulay duration is defined as the weighted average time to receive all cash flows, with weights based on the present value of each cash flow relative to the bond’s price. Since the times are in years, the resulting value is expressed in years. This makes Macaulay duration the pure year-based measure. Modified duration, by contrast, adjusts the Macaulay figure to reflect how sensitive the price is to changes in yield. It’s a rate of change in price per unit change in yield, used to estimate price movements rather than to quantify calendar time. Because its purpose is price sensitivity rather than a time horizon, it isn’t described as a time duration in years, so Macaulay duration is the one measured in years.

The main idea is that one duration is a direct measure of time, while the other is a sensitivity tool. Macaulay duration is defined as the weighted average time to receive all cash flows, with weights based on the present value of each cash flow relative to the bond’s price. Since the times are in years, the resulting value is expressed in years. This makes Macaulay duration the pure year-based measure.

Modified duration, by contrast, adjusts the Macaulay figure to reflect how sensitive the price is to changes in yield. It’s a rate of change in price per unit change in yield, used to estimate price movements rather than to quantify calendar time. Because its purpose is price sensitivity rather than a time horizon, it isn’t described as a time duration in years, so Macaulay duration is the one measured in years.

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