Duration

Duration tells you how much a bond's price will change when interest rates move. It is one of the most important risk metrics in fixed income.

Types of duration

Macaulay Duration

The weighted average time until all cash flows are received. Expressed in years.

Modified Duration

Measures price sensitivity. A modified duration of 5 means the bond price changes approximately 5% for every 1% change in yield.

Key relationships

• Longer maturity → higher duration → more interest rate sensitivity
• Higher coupon → lower duration → less sensitivity
• Higher yield → lower duration → less sensitivity

Example

If a bond has modified duration of 7 and yields rise by 0.5%, the bond price drops approximately 3.5% (7 × 0.5%).

Why it matters

• Duration helps you manage interest rate risk in your bond portfolio
• Match duration to your investment horizon to minimize risk
• When you expect rates to rise, reduce portfolio duration
• When you expect rates to fall, increase duration to capture price gains