What is it?
Bond duration is the cashflow weighted average of time. Suppose you have a following series of cashflows:
We explicitely assume that yield is 0.
1 2 3 | |
The bond duration would be calculated as:
$$ D = \sum_{t=1}^6 t \times 10 $$
Now assume that we have a positive yield of 10%. In this case, we need to discount each cashflow to its present value.
\[ D = \sum_{t=1}^6 \frac {10t}{(1+0.1)^{t}} \]
The intuitive equivalence is that if all of the bond's cashflows are collapsed into a single lumpsum payment, then at what time that payment would occur.