Your friend and fellow student Alex tells you that duration is the cash ﬂow weighted maturity of an asset or liability.Another student, Ben, tells you that it is the effective maturity.

Question

Quizplus · Accepted Answer

Duration is indeed the cash flow weighted maturity of an asset or liability, as Alex says, which accounts for the timing and size of cash flows. Ben's description of duration as the effective maturity also aligns with how duration measures the sensitivity of the price of a bond to changes in interest rates, effectively acting as a measure of the bond's maturity. Thus, both descriptions are correct in the context of financial analysis.

Your Friend and Fellow Student Alex Tells You That Duration