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Fixed Income & Macro·Bond Basics & Duration

What is a Bond?

9 min read

A loan, packaged into a tradable security

A bond is a loan from an investor to an issuer (a government, corporation, or municipality). The issuer agrees to pay periodic interest (coupons) and return the principal (face value) at maturity. Bonds trade in secondary markets — their prices move inversely to interest rates: when rates rise, the present value of fixed future cash flows falls.

Formula

Macaulay duration

D = Σ (t · PV(C_t)) / Σ PV(C_t)