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Duration of a fixed income instrument is a weighted average term to maturity. The time delay until the receipt of each cash flow is weighted by the contribution of that cash flow to the total present value of the bond.

Because coupon securities return cash to the investor earlier than say zero coupon bonds, their "duration" is shorter than a zero coupon of equal maturity. Investors attracted to these instruments are, for example, those that need to hedge long liabilities and so do not want to be concerned with "reinvestment risk" i.e. the possibility that market interest rates may fall in the future; and/or those who are constrained to the amount of cash they can invest but want maximum exposure to a market.

Bonds with enhanced “duration” refers to a group of debt securities where the interest and repayment structure of the bond is such as to lengthen the "duration" of the security compared with a traditional fixed interest security. Examples include zero coupon bonds, perpetual bonds and bunny bonds.

Source Publication:
Financial Terminology Database, Bank of England.

Cross References:
Bunny bonds
Zero-coupon bonds

Statistical Theme: Financial statistics

Created on Tuesday, September 25, 2001

Last updated on Tuesday, March 4, 2003