Duration
Duration is a measure of a bond's price sensitivity to interest rate changes, expressed in years. A higher duration means greater price volatility when interest rates change.
🎬 Video Explanation
Exam Tip
Modified duration estimates price sensitivity: a 1 percentage-point yield rise implies approximately duration percent price decline. Zero-coupon Macaulay duration equals maturity.
What is Duration?
Duration measures how sensitive a bond's price is to changes in interest rates. It represents the weighted average time until a bondholder receives all cash flows (interest and principal). Higher duration = more interest rate risk.
Types of Duration
| Type | Description |
|---|---|
| Macaulay Duration | Weighted average time to receive cash flows |
| Modified Duration | Price sensitivity measure (most commonly used) |
| Effective Duration | Accounts for embedded options (calls, puts) |
Duration as Price Sensitivity
Approximate Percentage Price Change = -Modified Duration × Change in Yield
Express the yield change in percentage points for a percentage price result (or in decimals for a decimal price result). Macaulay duration measures weighted time and is not the same as modified duration.
Example:
- Duration: 5 years
- Interest rate increase: 1%
- Price change: -5 × 1% = -5% decline
Duration vs. Maturity
| Factor | Duration | Maturity |
|---|---|---|
| Definition | Weighted average of cash flows | Time until principal repayment |
| Considers Coupons | Yes | No |
| Risk Measure | Yes | Partial |
Factors Affecting Duration
| Factor | Effect on Duration |
|---|---|
| Longer Maturity | Increases duration |
| Lower Coupon | Increases duration |
| Lower Yield | Increases duration |
| Zero Coupon | Macaulay duration = maturity; modified duration differs |
Duration Examples
| Bond Type | Typical Duration |
|---|---|
| Money Market | Very low (< 1 year) |
| Short-Term Bond | 1-3 years |
| Intermediate Bond | 4-6 years |
| Long-Term Bond | 7-12+ years |
| Zero Coupon (30-yr) | Macaulay duration = 30 years |
Duration and Portfolio Management
| Interest Rate Outlook | Duration Strategy |
|---|---|
| Rates Rising | Shorten duration (reduce sensitivity) |
| Rates Falling | Lengthen duration (increase sensitivity) |
| Uncertain | Match duration to investment horizon |
Duration Calculation (Simplified)
For a rough estimate:
- Duration is typically lower than maturity
- Zero coupon bond: Macaulay duration = maturity
- Higher coupon = Lower duration (more early cash flows)
Limitations of Duration
| Limitation | Explanation |
|---|---|
| Linear Estimate | Only accurate for small rate changes |
| Assumes Parallel Shift | Doesn't account for yield curve twists |
| Ignores Convexity | Convexity measures the curve in price/yield relationship |
Convexity
Convexity is the second-order measure that adjusts duration for the curvature in the price/yield relationship. Positive convexity benefits bondholders (price rises more than duration predicts when rates fall).
Exam Alert
Duration measures interest rate sensitivity. Higher duration = more price volatility. Zero coupon bonds have Macaulay duration equal to maturity. When rates rise 1%, bond price falls approximately by its duration percentage.
Study This Term In
Course Playlist156 videosVideos129 videosBlogs33 blogs RadioThird-party resources · We may earn a commission from purchases.
SIE Exam Prep 2025-2026: Complete Review + 510 Questions and Detailed Answer Explanations for the FINRA Securities Industry Essentials Exam (6 Full-length Exams)
By Test Prep, Newstone
$28.27 · 
Take courses on Udemy
Prep course on Achievable
Flashcards on MometrixCourse Playlist133 videosVideos125 videosBlogs33 blogs RadioThird-party resources · We may earn a commission from purchases.
Kaplan Series 7 License Exam Manual, 2nd Edition - Comprehensive Exam Prep for the Series 7 General Securities Representative Exam
By Kaplan Financial Education
$61.05 ·
Practice exams on ExamEdgeTake courses on UdemyPrep course on Achievable
Third-party resources · We may earn a commission from purchases.
Series 66 Study Guide 2025–2026: 10 Full-Length Practice Tests, 1600+ Realistic Questions, Detailed Answer Explanations, and Proven Strategies to Pass the Uniform Combined State Law Exam
By Bean, Charles K.
$29.99 ·
Study guide on MometrixPrep course on AchievablePractice exams on ExamEdgeRelated Terms
Interest Rate Risk
Interest rate risk is the potential for investment losses due to changes in interest rates, particularly affecting fixed-income securities like bonds whose prices fall when rates rise.
Bond
A bond is a fixed-income debt security where the issuer owes the holder a debt and pays interest (coupon) plus principal at maturity.
Yield
Yield is the income return on an investment, expressed as a percentage, including interest or dividends received.
Your AI study companion · 10 free interactions a day
Stay Updated
Get free exam tips and study guides delivered to your inbox.