Glossary

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Leverage Adjusted Duration

Financial Term

Leverage Adjusted Duration (LAD) is a risk management measure used in the financial industry to evaluate the sensitivity of a portfolio of assets to changes in interest rates, while taking into account the level of leverage used to acquire or hold those assets.

LAD is a modification of Modified Duration which measures the change in the price of a bond or portfolio of bonds for every 1% change in interest rates. However, in reality, many investors use leverage to amplify their returns and this could affect the actual duration of the portfolio. For such a scenario, LAD is used.

In simple terms, LAD adjusts the Modified Duration of the portfolio based on the level of leverage used. It takes into account the degree to which a portfolio has been financed by borrowing, rather than owned outright. LAD estimates the impact of a change in interest rates by factoring in the cost of borrowing and the associated interest rate. This provides a more realistic measurement of risk, considering the potential of leverage to amplify losses.

LAD is commonly used by investment managers and hedge funds to better understand the risks of their portfolios and to make informed decisions about how to manage those risks. By adjusting their duration estimates for the impact of leverage, investors can better hedge against adverse changes in interest rates and limit their exposure to potential losses.

Overall, LAD is an important tool for investors in the financial industry, helping to evaluate risk and return and make informed decisions about portfolio management.

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