# Definition of __Negative duration__

## Negative duration

A situation in which the price of the MBS moves in the same direction as interest rates.

# Related Terms:

The product of modified **duration** and the initial price.

A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

The weighted average of the time until maturity of each of the

expected cash flows of a debt security

The expected life of a fixed-income security considering its coupon

yield, interest payments, maturity, and call features. As market interest rates

rise, the **duration** of a financial instrument decreases. See Macaulay **duration**.

The time it takes for a policy or annuity to reach maturity.

The **duration** calculated using the approximate **duration** formula for a bond with an

embedded option, reflecting the expected change in the cash flow caused by the option. Measures the

responsiveness of a bond's price taking into account the expected cash flows will change as interest rates

change due to the embedded option.

The weighted-average term to maturity of the cash flows from the bond, where the

weights are the present value of the cash flow divided by the price.

A widely used measure of price sensitivity to yield

changes developed by Frederick Macaulay in 1938. It is measured in years and

is a weighted average-time-to-maturity of an instrument. The Macaulay

**duration** of an income stream, such as a coupon bond, measures how long, on

average, the owner waits before receiving a payment. It is the weighted

average of the times payments are made, with the weights at time T equal to

the present value of the money received at time T.

The ratio of Macaulay **duration** to (1 + y), where y = the bond yield. Modified **duration** is

inversely related to the approximate percentage change in price for a given change in yield.

The Macaulay **duration** discounted by the per-period

interest rate; i.e., divided by (1+rate/frequency).

A modification of standard **duration** to account for the impact on **duration** of MBSs of

changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that

reflects the impact of changes in prepayment speed or price.

A loan repayment schedule in which the outstanding principal balance of the loan

increases, rather than amortizing, because the scheduled monthly payments do not cover the full amount

required to amortize the loan. The unpaid interest is added to the outstanding principal, to be repaid later.

Related: net financing cost

The cash flow from the operating activities of a business

can be **negative**, which means that its cash balance decreased from

its sales and expense activities during the period. When a business is

operating at a loss instead of making a profit, its cash outflows for

expenses very likely may be more than its cash inflow from sales. Even

when a business makes a profit for the period, its cash inflow from sales

could be considerably less than the sales revenue recorded for the

period, thus causing a **negative** cash flow for the period. Caution: This

term also is used for certain types of investments in which the net cash

flow from all sources and uses is **negative**. For example, investors in

rental real estate properties often use the term to mean that the cash

inflow from rental income is less than all cash outflows during the

period, including payments on the mortgage loan on the property.

A bond characteristic such that the price appreciation will be less than the price

depreciation for a large change in yield of a given number of basis points.

## Negative covenant

A bond covenant that limits or prohibits altogether certain actions unless the bondholders agree.

## Negative goodwill

A term used to describe a situation in which a business combination

results in the fair market value of all assets purchased being more than the purchase

price.

## Negative Loan Covenants

Loan covenants designed to limit a corporate borrower's behavior

in favor of the lender.

## Negative pledge clause

A bond covenant that requires the borrower to grant lenders a lien equivalent to any

liens that may be granted in the future to any other currently unsecured lenders.

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