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DURATION

In this comprehensive guide, we will explore the DURATION function in Excel, which is a financial function used to calculate the Macaulay duration of a security that pays periodic interest, such as a bond. The Macaulay duration is a measure of the weighted average time until the bond’s cash flows are received, and it is used to assess the sensitivity of a bond’s price to changes in interest rates. By understanding the DURATION function, you can better analyze and manage your investments in bonds and other fixed-income securities.

DURATION Syntax

The DURATION function in Excel has the following syntax:

=DURATION(settlement, maturity, coupon, yld, frequency, [basis])

Where:

  • settlement is the date when the security is purchased or settled. This should be entered as a date in Excel.
  • maturity is the date when the security matures or expires. This should also be entered as a date in Excel.
  • coupon is the annual coupon rate of the security, expressed as a decimal. For example, a 5% coupon rate would be entered as 0.05.
  • yld is the annual yield of the security, expressed as a decimal. For example, a 6% yield would be entered as 0.06.
  • frequency is the number of coupon payments per year. This can be 1 for annual payments, 2 for semi-annual payments, or 4 for quarterly payments.
  • basis (optional) is the day count basis to be used for calculations. This can be one of the following values:
  • 0 or omitted: US (NASD) 30/360
  • 1: Actual/actual
  • 2: Actual/360
  • 3: Actual/365
  • 4: European 30/360

DURATION Examples

Let’s look at some examples of how to use the DURATION function in Excel:

Example 1: Calculate the Macaulay duration of a bond with a settlement date of January 1, 2020, a maturity date of January 1, 2030, a 5% annual coupon rate, a 6% annual yield, and semi-annual coupon payments.

=DURATION(“1/1/2020”, “1/1/2030”, 0.05, 0.06, 2)

This formula returns a Macaulay duration of 7.87 years.

Example 2: Calculate the Macaulay duration of a bond with a settlement date of March 15, 2020, a maturity date of March 15, 2025, a 4% annual coupon rate, a 3.5% annual yield, quarterly coupon payments, and an actual/actual day count basis.

=DURATION(“3/15/2020”, “3/15/2025”, 0.04, 0.035, 4, 1)

This formula returns a Macaulay duration of 4.63 years.

DURATION Tips & Tricks

Here are some tips and tricks to help you get the most out of the DURATION function in Excel:

  • Remember to input the coupon rate and yield as decimals, not percentages. For example, a 5% coupon rate should be entered as 0.05, not 5.
  • When comparing bonds with different coupon payment frequencies, make sure to use the same frequency for all bonds to get a consistent comparison.
  • If you are unsure about the day count basis to use, the default US (NASD) 30/360 basis is a common choice for many financial calculations.
  • Keep in mind that the Macaulay duration is just one measure of a bond’s interest rate sensitivity. You may also want to consider other measures, such as modified duration or convexity, to get a more complete picture of a bond’s risk profile.

Common Mistakes When Using DURATION

Here are some common mistakes to avoid when using the DURATION function in Excel:

  • Not entering the settlement and maturity dates as Excel date values. Make sure to input these dates in a format that Excel recognizes as a date, such as “1/1/2020” or “2020-01-01”.
  • Entering the coupon rate and yield as percentages instead of decimals. Remember to input these values as decimals, such as 0.05 for a 5% coupon rate.
  • Using an incorrect value for the frequency argument. Make sure to use 1 for annual payments, 2 for semi-annual payments, or 4 for quarterly payments.
  • Forgetting to include the optional basis argument when using a day count basis other than the default US (NASD) 30/360.

Why Isn’t My DURATION Working?

If you are having trouble getting the DURATION function to work in Excel, consider the following troubleshooting steps:

  • Double-check your formula syntax to make sure you have entered all the arguments correctly.
  • Ensure that the settlement and maturity dates are entered as Excel date values, not as text or numbers.
  • Verify that the coupon rate and yield are entered as decimals, not percentages.
  • Check that the frequency argument is set to the correct value for the number of coupon payments per year.
  • If you are using a day count basis other than the default US (NASD) 30/360, make sure to include the basis argument in your formula.

DURATION: Related Formulae

Here are some related Excel functions that you may find useful when working with the DURATION function:

  • MDURATION: This function calculates the modified duration of a security, which is a measure of the security’s price sensitivity to changes in interest rates. The modified duration is a more accurate measure of interest rate risk than the Macaulay duration.
  • COUPDAYS: This function calculates the number of days in the coupon period that contains the settlement date.
  • COUPNCD: This function calculates the next coupon date after the settlement date.
  • YIELD: This function calculates the yield of a security that pays periodic interest, such as a bond.
  • PRICE: This function calculates the price of a security that pays periodic interest, based on the security’s yield.

By mastering the DURATION function and related formulae in Excel, you can gain valuable insights into the risk and return characteristics of bonds and other fixed-income securities, helping you make more informed investment decisions.

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