Some improvements in calculation and use of bond duration (Q2758222)

We develop the basic well-known Macaulay duration concept, which is mostly used for coupon bonds. Assuming periodic and equal coupon payments, we first derive the bond price formula, and then, using the formula for the sum of geometric sequence, the new, easier-to-use duration formula. We also derive a very practical formula for duration of bond in a situation where the first payment comes at less than one basic period from today. The concept of duration plays a very important role in bond portfolio immunisation. We discuss immunisation strategies, which are closely related to the concept of duration given in this paper. The main issues in the paper are illustrated by a numerical example.