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You mentioned it is the avg time by which we get half of our money back.
Then if the duration comes out be 3.33 years and i add up T1, T2, T3 & T4(0.33 part of it) PV's , why do i not get the total PV amount? I cant understand the logic behind the duration years with the wieghted pv logic.
I have never been more troubled by a topic more than this. Thank you for your support John.
i do realise how silly it sounds to be expecting 3.33*X to be equal to X itself, but i cant for the love of god understand what this duration year signifies.
11d ago#2It is the same idea as the discounted payback period which is the number of years it takes to get back the principal using the discounted flows.
The Macaulay duration is the same idea and is used for bonds but it the average number of years it takes to receive back the returns.
If you had a bond costing 100 that paid no interest and was repaid in 4 years time, then the duration would be 4 years.
However, if it carried interest of (say) 5% then you would be getting a receipt of 5 each year and then a repayment of 100 in 4 years. So the duration will be less than 4 years because you are getting some of the money back earlier. We take a weighted average because the early flows are worth more than the later flows because of the time value of money.
Thank you so much for clearing my doubt, John. You are the Best teacher i have ever had.
11d ago#4You are welcome, and thank you for your comment :-)
