What Is Bond Duration
Duration measures how sensitive a bond’s price is to changes in interest rates. It isn’t simply the time left until maturity — it’s a weighted average of the time it takes to receive all of a bond’s cash flows, weighted by the present value of each payment.
A bond with a duration of five years will typically fall about 5% in price if interest rates rise by one percentage point, and rise about 5% if rates fall by one percentage point. The higher the duration number, the more sensitive the bond’s price is to rate moves.
What Determines Duration
Two factors dominate. First, longer maturities mean higher duration, since investors wait longer to recover their principal and are exposed to rate changes for a longer stretch of time. Second, lower coupon rates mean higher duration, because more of the bond’s total value is concentrated in the final principal repayment rather than spread across regular interest payments.
Comparing government bonds across maturities illustrates the pattern clearly: a 1-year bond typically carries a duration near 0.98 years, a 5-year bond around 4.6 years, a 10-year bond around 8.9 years, and a 30-year bond around 19.2 years. Duration rises with maturity, though not in exact proportion.
Why Duration Matters for Investors
When rates are expected to rise, shorter-duration bonds tend to hold up better since their prices are less sensitive to the move. When rates are expected to fall, longer-duration bonds offer more upside from capital appreciation. Checking a bond fund’s average duration gives investors a quick sense of how exposed that fund is to rate swings.
Duration is a linear approximation that works best for small rate changes; for larger moves, a related concept called convexity provides a more accurate estimate of the actual price change.
| Maturity | Duration (years) | Approx. price change per +1% rate |
|---|---|---|
| 1-Year | 0.98 | ≈ -0.98% |
| 5-Year | 4.6 | ≈ -4.6% |
| 10-Year | 8.9 | ≈ -8.9% |
| 30-Year | 19.2 | ≈ -19.2% |
Frequently Asked Questions
Is duration the same as maturity?
No. Maturity is when the principal is fully repaid, while duration is the weighted-average time to receive all cash flows, including interest. Only zero-coupon bonds have a duration exactly equal to their maturity.
Is a high duration always bad?
Not necessarily. When rates are expected to fall, high-duration bonds can outperform since their prices rise more for a given rate decline. Whether high duration helps or hurts depends on the direction rates move.
What is modified duration?
Modified duration adjusts Macaulay duration by dividing by (1 + yield to maturity), giving a more direct estimate of the percentage price change for a 1% rate move. It’s the version most commonly used in practice.
Where can I find a bond ETF’s duration?
Most fund providers publish ‘average duration’ or ‘effective duration’ in the fund’s fact sheet or prospectus, which is useful for comparing rate sensitivity across bond funds.
Key Takeaways
Duration is the key measure of how sensitive a bond’s price is to interest rate changes, rising with longer maturities and lower coupon rates. Balancing short- and long-duration bonds based on your rate outlook is a fundamental part of fixed-income investing. This article is for informational purposes only and does not constitute investment advice.
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