Interest rate sensitivity

Consider the example of a 5 year bond paying coupons of 4% p.a. annually in arrear and redeemable at par. Effective interest rate = 5%. The duration of the cashflow will be approximately 4.6203 years. What is the meaning of the 4.6203 years? How is this duration useful?

 

Duration measures the sensitivity of price to a unit change in interest rate. It's arrived by differentiating present value of bond cash flows with respect to interest rates. If the duration is 5, a 1% rise in interest rates is expected to lead to approximately a 5% drop in bond price. Hope this helps.

 

Thanks Oxymoron. Your explanation could not have been better.