What Is Macaulay Duration?
Macaulay duration is the weighted average life of a portfolio of bonds, also known as the term to maturity or average life. Expressed in years, it is also commonly viewed by traders as a measure of cash flow volatility with respect to prices. Volatility is a measure of risk and how much cash flows from bond portfolios fluctuate over time. As such, Macaulay duration is used as a tool to balance and hedge bond portfolios against the risk associated with changes in bond cash flows. Created by Frederick Macaulay in 1938, Macaulay duration was not widely used until the 1970s. There are several different types of duration to include: key-rate, modified, and effective. All measures are expressed in years. The difference is in the way each calculation accounts for changes in interest rates or other embedded options in the bond. Macaulay duration uses a weighted average approach.
