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Duration

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Published: 10th February 2010 by William Webster

Duration is used to measure interest rate risk. It is the weighted average life of bond's present values and is expressed in years.

As an approximation, a financial instrument that has a duration of 1 year will lose 1% of its value for a 1% increase in interest rates. A financial instrument with a duration of 3 years will lose 3% of its value for a 1% increase in interest rates. The greater the portfolio duration the greater the interest rate risk you run.

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