DURATION AND INTEREST RATE RISK FOR UNCERTAIN CASH FLOW STREAMS

This paper amends the Hicks-Macaulay-Samuelson duration analysis to allow for uncertainty in asset cash flows. An asset's duration measure then becomes a random variable which may possess no central moments. We show, however, that a transformed version of the duration measure is normally distributed. This can be used to make probability assessments of the sensitivity ofthe present value of an asset's cash flow stream to interest rate movements.