Simple definition
Duration measures how sensitive a bond's price is to changes in interest rates, expressed as a number of years. The higher the duration, the more the bond's price will swing when rates move. It's not the same as time to maturity, though longer bonds usually have higher duration. Think of it as a seesaw: longer duration means bigger tilts when rates shift.
Why it matters
Duration is the single best gauge of a bond's interest-rate risk. When rates rise, bonds with higher duration fall more in price; when rates drop, they gain more. Knowing a bond's or fund's duration tells you how much of a ride to expect before you buy.
Real-life example
Suppose a bond fund has a duration of about 5 years. As a rough guide, if interest rates rose by 1 percentage point, the fund's price might fall around 5%; if rates fell 1 point, it might rise about 5%. These are simplified, hypothetical figures to show how duration works, not a precise prediction.
Common mistakes
- Confusing duration with the years until maturity, which aren't the same thing.
- Ignoring duration and being surprised when a bond fund drops as rates rise.
- Assuming a bond labeled safe can't lose value, when high duration means real price swings.
- Holding long-duration bonds for money you'll need soon, then selling at a loss.
Pro tips
- Check a bond fund's average duration to gauge its interest-rate risk before buying.
- Favor shorter duration for money you'll need in the near term.
- Remember higher duration cuts both ways — bigger gains and bigger losses.
- Pair duration with credit quality to see a bond's full risk picture.
Related Money Dictionary terms
- Interest Rate RiskThe risk that rising interest rates push down the value of bonds you already own.
- BondA loan you make to a government or company that pays you interest and returns your money on a set date.
- Maturity DateThe date a certificate of deposit or other fixed-term product ends, when you can withdraw your money and earned interest without penalty.
- Yield to MaturityThe total return you would earn on a bond if you held it until it matures and reinvested all interest.
- Bond LadderA set of bonds with staggered maturity dates so a portion comes due at regular intervals for steady access to cash.
- Treasury BondA long-term loan to the U.S. government that pays fixed interest and is considered very low risk.
Frequently asked questions
Is duration the same as a bond's maturity?
No, though they're related. Maturity is simply how long until the bond repays its face value. Duration measures how much the price reacts to interest-rate changes, weighing in the timing of every interest payment too. Longer-maturity bonds usually have higher duration, but a bond's coupon and structure affect duration as well.
Why does duration matter when interest rates change?
Bond prices move opposite to interest rates, and duration tells you how much. A bond with a duration of 5 falls roughly 5% if rates rise 1 point, while one with a duration of 10 falls about twice as much. The higher the duration, the sharper the price swing in either direction.
How can I lower interest-rate risk using duration?
You can favor bonds or funds with shorter duration, which move less when rates change, for money you can't afford to see drop. Some investors also build a bond ladder — holding bonds that mature at staggered dates — so cash comes due regularly and less money sits in long-duration bonds at any one time.
Knowing what Duration means is knowledge — the first half. A brick gets placed when you act on it: look up the average duration of a bond fund you own to see how much it could swing when rates move.
Also builds: Retirement & Financial Independence
Sources & references
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Plain-English education — not personalized legal, tax, or investment advice.