Bond Duration Explained Simply In 5 Minutes 

Great to hear! My pleasure Bovino

Thank you so much! It means a lot

Glad it was helpful Alyssa! I try to make it as simple as possible

My pleasure, there is a lot more to it than that!

My Mahendra! Thanks for the feedback

My pleasure and glad it helped!

My pleasure and thanks for the feedback Guobo!

Appreciate the feedback Nkosi!

Glad it was helpful!

Glad it was helpful! It is also a measure of duration of time outstanding until you expect to get the payments for the bond so I think that is why they called it duration

Glad it helped! Thank you

Glad to hear that!

Thank you Priti!

It is my pleasure Lidia! Thanks for the nice comment

Glad you liked it!

Haha thank you! I really appreciate the support 🙏

Hello, this video is a simplified explanation of duration! The explanation you provided conflates a few distinct financial concepts. Macaulay Duration measures the time it takes to recover a bond's cost through its cash flows, not the specific interaction between price appreciation and reinvestment risk that you've described. Modified Duration, on the other hand, accurately captures a bond's price sensitivity to interest rate changes, separate from the concept of Yield to Maturity (YTM), which deals with the total expected return assuming all payments are reinvested at the YTM rate. For anyone looking for an accurate and nuanced video on the differences between macaulay, modified and effective duration, you can find that here: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-2tXjJR1W0YU.html

Glad it was helpful!

Yes, it is because the lower the yield, the lower the coupon, which means you will be getting your money back later on. For example, a zero yield bond will pay no coupons and all of the money will be paid back at the very end. So with lower yields, it takes longer time (or a higher duration of time) to get the money back from the loan

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You're welcome!

You’re welcome 😊

Thank you!

Much appreciated!

Glad to hear!

Thank you!

No problem 😊

Much appreciated!

Yes, that is correct. I find it easier to explain by using an annual bond as an example

@@RyanOConnellCFA Hey, thank you for the response. Do you have a video example using semi-annuals? Or is the calculation the same? I have seen it done a couple different ways with regards to the discount factors exponent ...some use 1 2 3 4 5 6...while some use 1, 1.5, 2, 2.5, etc. I noticed the results are different. (I maybe calculating it wrong)

Yes, you're correct that bond duration can also be interpreted as the length of time it takes an investor to recoup their investment in a bond. However, it's important to note that it's not simply a matter of waiting 2.75 years in the case of a bond with a duration of 2.75. Rather, duration in this sense is a weighted average of the present value of a bond's cash flows, which include periodic interest payments and the eventual repayment of the bond's face value. What this means is that if a bond has a duration of 2.75, the investor would, in theory, recover their initial investment over the course of 2.75 years, considering both the regular coupon payments and the principal repayment, and adjusted for the time value of money. However, this assumes a constant interest rate environment, which is rarely the case. Changes in market interest rates can significantly impact the actual time it takes to recoup an investment, which is why duration is also used as a measure of a bond's sensitivity to interest rate changes. Remember, lower duration means lower interest rate risk, and vice versa. So, a bond with a 2.75 duration would be less sensitive to interest rate changes compared to a bond with higher duration.

@@RyanOConnellCFA helps. Thank you 🙏🏼

Thanks Mirza! I think this article will answer your question better than I could in a simple comment: etfdb.com/rising-interest-rates/duration-hedging-and-rising-rates/ Does that help?

@@RyanOConnellCFA great video, thanks.

@@robertcesar9752 Much appreciated my friend

That is not entirely correct. You are thinking about it more like a break even point of a project you'd learn about in corporate finance. It is a weighted average, not a breakeven time period. The percentage change component of what you said is correct however. Just know this is a simplified assumption that doesnt account for convexity

@@RyanOConnellCFA Got it, thank you.

It is the Macaulay Duration that I calculated but you are correct that the Modified Duration better describes the relationship of how bond prices change with yield. Check out this video that I just published that goes into the nuanced details of Macaulay Duration, Modified Duration, and Effective Duration: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-2tXjJR1W0YU.html

it actually is the Macauley duration but the last sentence is wrong in my opinion. The unit of the macaulay duration is years and not unitless..

Thanks for clarifying this. I know understand that Macaulay duration is the years required to receive the fixed cash flows from the bond. Modified duration measures the sensitivity of the bons price to changes in int. Rate.

Thats great! Glad you enjoyed

I think this has more to do with your internet connection than the video or RU-vid

Yes. Think like you would with discrete probability: at each time, there's a proportion of the bond's price that occurs at that time. MacDur is then the "expected time" regarding these proportions (i.e. "probabilities").

Hey Erick, I wouldn't necessarily say break even point as you don't make money on every bond (due to an uncertain interest rate environment). It is the weighted average amount of time that you expect the present value cashflows to pay out. Don't worry about the initial price you paid