Duration

Short definition

Duration is the weighted tenor that measures how cash flows respond to a rate change. Modified duration approximates the percent price change when yield moves; it is the ruler for rate risk on debt and bonds.

Detailed explanation

Macaulay is the PV-weighted average time of coupons and principal. Modified = Macaulay / (1+y). Convexity corrects the linear view in large shocks.

Floating loans collapse duration to the reset date; long fixed bonds extend it. The asset–liability duration gap is treasury rate risk. There is no universal target duration; the liability profile sets it.

Why it matters for the CFO

Long fixed debt stays economically expensive when rates fall; duration makes that cost visible. If assets (receivables, inventory) are short duration, the gap opens.

How it is calculated

Modifiye durasyon ≈ −(ΔP/P) / Δy ; Macaulay = nakitlerin ağırlıklı ortalama vadesi

Macaulay is PV-weighted time; modified turns it into yield sensitivity. On a cash loan, “price” is economic value.

Variables in the formula

• D_mod: modified duration (percent price change per yield change)
• y: yield

How to read it

Duration of 4 implies about a 4% price drop for +100 bp (small shock, parallel curve). A twist and callable debt break the approximation.

Definitions are educational. They are not investment, credit or tax advice.