1. GNT 2012 Mark Fielding-Pritchard mefielding.com1

2. Macauley’s Duration mefielding.com2 DEFINITION of 'Macaulay Duration' The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest ratesweighted averageterm to maturitypresent valuethe cash flow

3. Periodic Yield = IRR mefielding.com3 5%10% MV(1079.68) Interest 6% coupon, 5 years= 4.329/3.791 259.74227.46 Redemption $100,784.0621.0 (35.94)(231.22)

4. Macauley’s Duration Bond A mefielding.com4 PV 160 57.69 260 55.47110.95 360 53.34160.02 460 51.29205.15 51060 871.244356.21 4890.03 Duration4890.03/1079.68 =4.53

5. Macauley’s Duration Bond B mefielding.com5 PV 140 38.46 240 36.9873.96 340 35.56106.68 440 34.19136.77 51040 854.804274.02 4629.90 Duration4629.90 /1079.68 =4.29

6. b)  The longer it takes to receive our money the more sensitive the bond is to interest rate changes  For investors duration is therefore a useful tool, those who require cash will buy short duration bonds, those who want capital gains longer duration bonds  Duration only measure bonds sensitivity to 1 variable  Duration assumes a linear relationship between time to receive money and bond prices, this is not seen in real life mefielding.com6

7. c)  Industry risks- some industries are riskier than others, hotels & restaurants  Financial flexibility- ease of raising finance  Earnings protection- product range, diversity of products  Evaluation of management- qualifications, procedures mefielding.com7