It then becomes a simple matter to calculate the duration statistic for the payment stream. Analysts and investors have difficulty developing creditable estimates for next quarter's dividends, much less for those in the far future. Second, there is little agreement about what interest rates to use when discounting the payment streams to present value. And third, changes in interest rates could also affect the payment streams. Increases in interest rates could slow down the economy and thereby reduce a firm's sales, earnings and dividend stream.
Duration gives an indication of how sensitive a portfolio's value is to changes in interest rates.
George R. Arrington works for the Federal Reserve System in New York City. All rights reserved. Inc. All rights reserved. Free E-mail Newsletter.