Macaulay Duration

Key Highlights

• Macaulay duration is a fundamental fixed-income measure that calculates the weighted average time (expressed in years) required for an investor to recover the bond’s total cash flows, including periodic coupon payments and principal repayment.

• Key uses of macaulay duration includes assessing interest rate risk, portfolio construction & risk control and asset–liability matching.

Macaulay Duration is a fundamental fixed-income measure that calculates the weighted average time (expressed in years) required for an investor to recover the bond’s total cash flows, including periodic coupon payments and principal repayment. It is widely used by wealth managers, institutions, and fixed-income analysts to evaluate interest rate sensitivity and guide portfolio positioning.

Understanding Macaulay Duration

Macaulay Duration considers the timing and present value of each cash flow, providing a comprehensive view of how long it effectively takes to receive the bond’s value.

• Bonds with higher duration are more sensitive to interest rate movements.
• Bonds with lower duration offer more stability and lower interest rate risk.

Key Uses of Macaulay Duration

1. Assessing Interest Rate Risk

It helps investors anticipate how changes in interest rates may influence bond prices, supporting tactical and strategic decisions in fixed-income allocations.

2. Portfolio Construction & Risk Control

Macaulay Duration allows wealth managers to build portfolios aligned with clients’ risk profiles by balancing long-duration and short-duration exposures.

3. Asset–Liability Matching

Institutional investors use duration to match the timing of assets’ cash flows with future liabilities, reducing the impact of interest rate volatility.

Macaulay Duration vs. Modified Duration

While Macaulay Duration indicates the average time to cash-flow recovery, Modified Duration converts this into direct price sensitivity.

• Macaulay Duration → Measures time-weighted cash flow recovery

• Modified Duration → Measures price change for a 1% change in interest rates

Both metrics work together to provide a complete picture of bond behaviour.