Average duration serves as an important concept for bond investors. Duration refers to how long a bond takes to repay its cost. Investors use duration to select bonds or to speculate on market interest rate changes. Bonds with longer durations have a greater risk of losing money due to increasing interest rates.
Calculate Bond Duration
Averaging durations requires an investor to first find the duration for each bond product. The formula essentially involves dividing the current cash flow -- which consists of coupon payments and repayment of capital -- by the price of the bond. But beginning investors should leave the exact calculation to an online calculator such as the one from Wolfram Alpha (see Resources). Investors will need to know the bond's settlement and maturity rates, annual yield and annual coupon rate to use the calculator.
Find the Average
Find the average for all of an investor's bond products by adding together the calculated durations and divide that answer by the number of durations. The average will give an investor a quick look at the interest rate risk exposure for the bond portfolio.