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Hi John,
I hope all is well with you and your family, given the COVID situation worldwide.
My question is about duration.
I had in my notes that this was the time taken for the investment (etc) to return it’s whole value, however in some answers to exam questions I have seen this explained as the time taken for half the value to be returned. I’m quite confused by this, could you help please?
Much appreciated John.
The time taken to return its whole value is the payback period.
The duration is the time taken (approximately) to return half the value.
Have you watched my free lectures on this?
Hi John, yes I watched your lectures on this.
However I’m still a bit confused on this. Your notes on page 51 on Macaulay Duration day it’s ‘the average time it takes for a bond to pay its principal and interest’. How is this the time it takes to return half the value? I’m still stuck on this for some reason. The calculation is simple enough and I can answer questions on it’s just the theory that’s not clicking.
I know that payback appraisal is the time it takes to return the investment, without consideration for any cash flows after this has been returned.
As I wrote before, although we standardly say that it is the time taken to return half the value, that is really only approximate.
It is effectively because we are taking a weighted average of the returns with more weighting given to the early returns because later returns become more uncertain because of potential changes in required rates of return.
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