Macaulay duration
The average time to receipt of a bond's cash flows, weighted by present value. Measured in years, and the horizon at which the two rate risks cancel.
Where you will meet it
Macaulay duration appears in 6 learning outcomes on the CFA syllabus. A few of them:
- Explain the investment horizon and the gap in duration relative to it
“Assuming a single parallel shift in yields soon after purchase, at a horizon equal to the bond's Macaulay duration the two effects cancel and the realised return equals the original yield to maturity, which is the immunisation result.”
- Assess ways of funding one future liability with a bond portfolio
“The bond portfolio's market value must at least equal the liability's present value, its Macaulay duration must equal the time to the payment date, and its convexity should be as low as possible while still exceeding the liability's.”
- Set out the methods for estimating expected returns on fixed income
“The discounted cash flow approach uses today's yield to maturity; for a horizon equal to Macaulay duration, yield changes roughly offset between price and reinvestment, so yield is a fair estimate, adjusted for expected rolldown and any expected yield change.”
- Tell apart Macaulay duration, modified duration and money duration
“Macaulay duration is the weighted average time to receipt of a bond's cash flows, with each weight the present value of that cash flow as a share of the price; it is measured in years.”
See also
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Practise macaulay duration until it is automatic: questions that explain every wrong option.
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