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Why when calculating the macaulay duration does the top half of the equation only consider positive cash flows when the bottom half considers the NPV (with the negative cash flows)?
I’ve been trying to get my head around it.
Thanks
I think I got that wrong – only positive cash flows are used?
I got confused by the examples in the lectures.
As in one example we were given the cost of capital but in the other, we needed the market value (the negative cash flow) to calculate IRR (cost of capital).
Why in the second example in chapter 11 was the market value an outflow at time 0? It didn’t state this in the question.
Just as was the case for Paper FM (was F9), the market value of debt is the PV of future receipts discounted at the investors required rate of return (the yield).
If we know the market value then we can calculate what the yield is (the IRR of the flows). If we don’t know the MV but do know what the yield is then we can calculate the MV (discounting the receipts at the required return).
In neither case are we considering the cost of capital. We are simply looking at the debt finance and the yield is the investors required rate of return.
It might help you to look back at the Paper FM lectures on the valuation of debt.
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