Duration: A Bond's Interest-Rate Sensitivity

What Is Duration?

When interest rates move, bond prices move in the opposite direction. But not all bonds move by the same amount. Duration is the tool that tells you how much a bond's price is likely to shift for a given change in rates — think of it as the lever length on a seesaw: the longer the lever, the bigger the swing on the other end.

Specifically, modified duration — the version traders and portfolio managers use most often — expresses the expected percentage price change in a bond for every one-percentage-point move in its yield. Suppose a bond has a modified duration of 6. If its yield rises by one percentage point, the bond's price falls by roughly 6%. If the yield falls by one point, the price rises by roughly 6%. That's the core idea.

Duration is measured in years, which can be confusing because it also has a pure time interpretation (called Macaulay duration — the weighted average time to receive all of a bond's cash flows). In practice, when people say "duration" in a market context, they almost always mean the modified version that predicts price sensitivity. The two numbers are closely related but not identical.

Why Duration Is the Central Risk Measure for Bonds

Bond investors face many risks — credit risk, liquidity risk, inflation risk — but interest-rate risk is the one that affects nearly every bond simultaneously. When a central bank raises its policy rate, yields across the market tend to rise, and bond prices fall. Duration tells you how much of that pain any particular bond is likely to absorb.

You can follow live bond market moves on the bonds overview page, but the numbers only make sense once you understand what duration is doing underneath them. A bond showing a yield of, say, 4.5% looks identical to another bond at 4.5% unless you also know their durations — one might barely twitch on a rate announcement, while the other lurches.

Duration also shapes how the entire bond market is structured. Traders, fund managers, and central banks all talk about "duration exposure" as a core position metric, meaning how much interest-rate sensitivity their holdings carry in aggregate.

What Makes Duration High or Low?

Two factors dominate: maturity and coupon size. Understanding each one makes duration intuitive rather than mechanical.

Maturity

A longer-maturity bond takes more time to pay back its face value. The longer you have to wait for your money, the more time there is for rising rates to make your fixed payments look less attractive compared to newer, higher-yielding bonds. So longer maturities mean higher duration — more price sensitivity. A 30-year bond will swing far more than a 2-year note in response to the same yield move. This is why the yield curve matters so much: the longer end of the curve is also the more volatile end.

Coupon Size

A coupon is the periodic interest payment a bond makes, expressed as a percentage of its face value. A high-coupon bond pays you back a meaningful portion of your investment early and often, which effectively shortens your average waiting time for cash flows. That lowers duration. A low-coupon bond (or a zero-coupon bond, which pays nothing until maturity) makes you wait almost entirely until the end — so virtually all of your cash flow sits at the far end of the time horizon. That maximizes duration.

Put both factors together: a 30-year zero-coupon bond is the extreme case of maximum duration. A short-dated bond with a high coupon sits at the other extreme, almost indifferent to rate moves.

Duration in Action: An Illustrative Comparison

The table below is a hypothetical illustration only — the numbers are constructed to demonstrate the concept clearly, not to represent any real bond or current market level. Suppose yields rise by one percentage point across the board. Here is how three different bonds might respond, depending on their approximate duration:

Notice how the 30-year bond absorbs roughly nine times the price damage of the 2-year note for exactly the same one-point yield rise. This is why long-dated bonds are often described as carrying more "rate risk" — and why government bond yields, especially the 10-year benchmark, are watched so closely as a barometer for the whole market.

Duration doesn't predict where yields will go — it simply translates a yield move, whatever its size, into an expected price impact. The yield move itself depends on everything from central bank decisions to inflation data.

How to Read Duration Numbers in Practice

When you see a bond or bond fund described as having a duration of, say, 5, the practical read is: "for every one-percentage-point rise in interest rates, this bond's price is expected to fall by about 5%." A duration of 12 means about 12% sensitivity. A duration of 1 means almost nothing happens to the price when rates tick up or down a little.

For bond funds, duration is averaged across all the holdings, weighted by value. A short-duration bond fund might carry a duration of 2 or 3, while a long-duration or "long bond" fund might run 15 or higher. This is why, during periods of rapidly rising rates — like those seen in many countries in 2022 — long-duration bond funds suffered far larger losses than short-duration ones, even though both held bonds considered safe from a credit standpoint.

Duration also interacts with basis points. One basis point is one-hundredth of a percentage point (0.01%). The "dollar value of a basis point," sometimes called DV01, tells a trader exactly how many dollars a position gains or loses per basis-point move. It is duration applied to a specific notional amount.

Duration and the Yield Curve

Duration helps explain why different parts of the yield curve behave differently. Short-maturity instruments — like treasury bills — have very low duration, so their prices barely move even during rate turbulence. Long-maturity bonds sit at the other end, absorbing amplified swings.

When the yield curve is steep (long-term yields much higher than short-term), there is often a large duration gap between short and long bonds. When the curve flattens or inverts, those same bonds may reprice sharply, and duration helps quantify exactly how much. Economists and traders use duration as a lens for understanding not just individual bonds but the interest-rate sensitivity of entire economies — government debt loads, mortgage markets, and pension fund liabilities are all assessed partly through a duration framework.

One More Refinement: Convexity

Duration is a linear approximation — it works well for small yield moves but becomes less accurate as moves get larger. Convexity is the correction term that accounts for the fact that the price-yield relationship is actually a curve, not a straight line; bonds with higher convexity lose less than duration alone predicts when yields rise, and gain more when yields fall. For most readers, knowing convexity exists and softens duration's estimate in large rate moves is enough.

For a broader foundation, see why bond prices and yields move in opposite directions — duration is the quantification of that relationship. You can also track the economic events that most often shift yields on the economic calendar, and explore how central bank policy decisions feed into rate moves on the QE, QT, and central banks guide.