How to Calculate Duration

Don't be left in the dark when it comes to your investments. Take matters into your own hands and do the math to be sure you come out on top.

Instructions

  • TIP: Duration is always expressed in negative numbers.
  • Step 1: Determine the total market value for each year. Then add up the the time periods to get the final duration of the bond, which should be expressed as a whole negative number. This is how many years until the bond's value is recovered.
  • FACT: The $5,000 double-E series bond features the face of Revolutionary War hero Paul Revere.
  • Step 2: Divide each of the present value factors by the current market value to get the time period for that value.
  • Step 3: Use the present value factor to get the present value in dollars for each year. Add each of these calculations together to get the total market value of the bond.
  • Step 4: Use the yield per period formula: one plus the annual interest rate multiplied by time of the payment divided by one to determine the present value of the bond.
  • Step 5: Use a calculator to multiply the present value factor by the amount of the coupon -- in dollars -- to get the present value factor in dollars.
  • Step 6: Search online for a bond-pricing formula that will tell you the true cost of a bond based on the length of time for the bond, the interest rate, and the coupon payment.

Popular Categories