Macauley duration

Last updated: 17.03.2016

Macauley duration is an indicator of bond´s sensitivity to interest changes. It can be alternatively used as a method for investment project appraisal. (35)

The steps for calculation:

  1. Preparation of the relevant cash-flow table for each period – see the possible proforma in the article about NPV.
  2. Calculation of present value of relevant cash inflows (not capital outflows!) for each period and their aggregation.
  3. Weighting each period´s relevant cash inflows (not capital outflows!) with the time factor (= the year order to which the cash inflow relates; e.g. multiplication of cash inflows in year 3 with a factor of 3) or bond´s current market value, calculation of their present value for each year and sum them up.
  4. Calculation of the duration as division of the results from step 3 by step 2:  total weighted present value of cash inflows / total present value of cash inflows (35)

 

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Sources:

35. Macaulay Duration (online). Citation date: 20.1.2016. Available from www: http://www.investinganswers.com/financial-dictionary/bonds/macaulay-duration-5079



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