MDURATION

MDURATION is a term used in finance, particularly in the context of bond valuation. It refers to a measure of a bond's price sensitivity to changes in interest rates. More specifically, it quantifies the weighted average time until a bond's cash flows are received. The longer the duration, the more volatile the bond's price will be in response to interest rate fluctuations.

The calculation of MDURATION involves discounting all of a bond's future cash flows, including coupon payments and the principal repayment, back to their present value. Each cash flow's present value is then divided by the bond's current market price to determine its weight. The duration is the sum of these weights multiplied by the time until each cash flow is received.

Higher coupon payments reduce duration because they are received sooner, thereby shortening the weighted average time to maturity. Conversely, zero-coupon bonds have a duration equal to their time to maturity. MDURATION is a crucial tool for investors seeking to manage interest rate risk within their portfolios. It helps in comparing the interest rate sensitivity of different bonds and in constructing portfolios that align with an investor's risk tolerance and market outlook.