Duration

Duration can be thought of as the lever between interest rates and bond prices. If a bond has a duration of 7 years, a rough rule of thumb says its price will move approximately 7% in the opposite direction for every 1 percentage-point change in interest rates. A bond with duration of 2 years moves far less for the same rate shift. The longer the lever, the bigger the swing. This is why traders typically watch duration closely when interest rate decisions are expected — check the economic calendar for central bank meetings.

Duration is related to, but not the same as, maturity. A 10-year bond always matures in 10 years, but its duration will be somewhat less than 10 — because coupon payments arrive before maturity, pulling some of the bond's value closer in time. A zero-coupon bond (which pays nothing until maturity) is the one case where duration equals maturity exactly, since all cash flow is concentrated at the end.

The most widely used version is called "modified duration," which directly translates to that price-sensitivity percentage. Another version — "Macaulay duration" — is the weighted average time, in years, until a bond's cash flows are received; modified duration is derived from it. Most market data tables report modified duration. For a hypothetical example: a bond with modified duration of 5 and a YTM that rises by 1 percentage point would be expected to lose roughly 5% in price.

Duration also applies to entire bond portfolios, not just individual bonds. Fund managers adjust portfolio duration deliberately — shortening it to reduce rate sensitivity, lengthening it to increase it. Understanding duration is central to reading bond market volatility during rate cycles.