Bond Duration - Basics

Thanks Mathew sir for your expert comments on duration : very informative,
Also it can be employed for controlling interest rate sensitivity of a portfolio based on changes in interest rate movements.
Number of future contracts to achieve a target duration is given by
[(target duration – initial duration) x Initial market value of portfolio] / [duration of futures x market value of futures] and for increasing duration go long on futures and for decreasing vice versa,

Attention:
In my earlier post there is a correction, the exposure should be divided by dollar duration to get the Hedge ratio. Hedge ratio is the number of interest rate options to be bought for the exposure or size of ones portfolio. 
5000 is got in it as the amount the portfolio looses for the rise in interest rate expected. It is change in value of the portfolio to change in interest rate on  bonds.

Duration is used to calculate the time in which one can recover the investment in a bond. I shall give the long calculation, which is suppose annual return on a bond is 10 ie; a 10%bond with face value 100. Suppose it is a 10 year bond then duration= {10(10/(1.10)+10(2)/(1.10)^2+10(3)/(1.1)^3....10(10)/(1.1)^10}the whole divided by {10/(1.10)+10/(1.1)^2+10/(1.10)^3+........+10/(1.1)10 which is the "weighted average payback period". Suppose if you pick up a bond it is based on reinvestment returns and if the above bond has a duration of x years then it will pay back your investment in x years.
This phenomenon was first noticed by Prof. Hicks and later on came to be used in bond immunisation where we can hedge against interest rate fluctuation on the value of a bond portfolio using this. Then that is another story. Suppose if one has a portfolio of 100000 bonds. If for say 1 percent point rise in rate the bond depreciates by 5000 then "dollar duration" is 50000 x duration. This divided by the exposure which is the 100000 gives the number of options to be bought. As the interest rises the options compensates for the loss in value of the portfolio and the protfolio is immunised. 

Nice post Padmanabhanji, really very informative. Thanks for sharing...

thanks for sharing very simple and exact way to calculate duration of the bond measures..
thanks to Mr. taranath  for Ur comment too.

Good Padmanabhanji,
Investment in debt is a sure shot for predictable yields, provided ratings are good and we have of keep track of the company & industry. There are cyclicals, due to which industries get into negetive sentiment and growth temporarily and recover with more pace. If you identify the situation and invest, you will be a decent earner.
Bonds which are listed and traded are followed up by financial institutions. Normally, bond funds, provident funds, pension funds etc will be focussing their investments here and gaining decent and good returns. Bonds will carry interest which will be given on par value, whereas bonds will be traded nrmally at a discount during 90% of the year. This characteristic gives the bonds and Debentures a supernatural returns. Also remember Debentures are also safe avenues since 'Debenture holders are considered as First Debtors of any company.

What I have given is only the basics and simplest way for calculating duration. I request experts in this field to give more in depth analysis on the concept of duration.
Duration is the first derivative of the price yield function of a bond.  They can give only approximate values and today with so much computer programs we can calculate  the value of a bond considering all the financial variables with better precision , also duration is a recommended only in the case of small changes in yield.

For  larger changes ‘convexity’ (2 nd derivative of the price yield function) is preferred over duration.