FIN2106 Lecture Notes - Lecture 9: Discounting, Cash Flow, Weighted Arithmetic Mean
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Module 9 – FIN2106
-Duration
oDuration is a measure of the effective maturity of a security
Duration incorporates the timing and size of a security’s cash flows
It shows the weighted average time for receipt of cash flows
Duration also measures how price sensitive a security is to changes in
interest rates
The greater (shorter) the duration, the greater (lesser) the price
sensitivity
Duration measures the average time to receipt of cash flows.
Duration =
oWhere cf = cash flow, df = discount factor, t = period
From an economic viewpoint, duration is an ‘elasticity’.
Where: P = the price (or market value) of the asset, r = the
interest rate or yield, D = the duration of the asset
- Duration of a perpetuity
oThe duration of a perpetuity can be calculated as shown:
o Therefore, for a bond paying 5% p.a. in perpetuity, the duration is:
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Document Summary
Duration: duration is a measure of the effective maturity of a security. Duration incorporates the timing and size of a security"s cash flows. It shows the weighted average time for receipt of cash flows. Duration also measures how price sensitive a security is to changes in interest rates. The greater (shorter) the duration, the greater (lesser) the price sensitivity. Duration measures the average time to receipt of cash flows. Duration : where cf = cash flow, df = discount factor, t = period. From an economic viewpoint, duration is an elasticity". Where: p = the price (or market value) of the asset, r = the interest rate or yield, d = the duration of the asset.
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7.37%. 11.05%. 8.32%. |
It ignores cash flows occurring after the payback period. It ignores the time value of money, that is, dollars received in different years are all given the same weight. |
1.82. 2.00. 1.94 |
undervalued. overvalued. |
13.92%. 16.34%. 12.17%. |
$221.86. $195.23. $257.35. |
10.82%. 11.76%. 9.64%. |
10 years. 4.58 years. 6.12 years. |
12.04%. 14.93%. 9.15%. |
1.24 years. 1.62 years. 1.15 years.
|