Duration
Duration measures how sensitive a bond’s price is to interest rates. Modified duration gives the approximate percentage price change for a one-percentage-point change in yield: a bond with a duration of 7 loses about 7% if yields rise by 1 point.
Two bonds can both yield 4% yet react very differently when rates move. Duration is the number that tells you how much. It combines a bond’s maturity, coupon and yield into one measure of interest-rate sensitivity, and it is printed on almost every bond fund factsheet. This entry explains what duration means, the simple rule of thumb for using it, and its limits.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Modified duration, Macaulay duration, Key rate duration
- Updated
Duration in plain words
Duration is a measure of how much a bond investment is likely to change in value if interest rates rise or fall. Generally, the higher the duration, the more sensitive the bond is to rate changes.1
A rough rule: price change ≈ −duration × change in yield. In FINRA’s example, a bond with a duration of 10 would be expected to gain about 10% if rates fell by one percentage point — and lose about the same if they rose.1 See Interest Rate.
How to use duration, step by step
Find the duration
Bond funds list it in their key facts; for single bonds it is calculated from the cash flows.
Estimate the price move
Percentage change ≈ −duration × yield change (in percentage points).
Know what drives it
Longer maturity and lower coupons mean higher duration.2
Match it to your horizon
Shorter duration if you may need the money soon.
Compare funds
Similar yields with very different durations carry very different rate risk.
Remember the limits
The rule works for small rate moves; large moves need convexity. See Convexity.
Worked examples
Example 1 — Rates rise
Rate riseA bond fund has a duration of 6. Yields rise by 1.5 percentage points.
| Estimated price change | −6 × 1.5 = −9% |
Duration turns a rate move into an expected price move.
Example 2 — Same yield, different risk
ComparisonFund A (duration 2) and fund B (duration 12) both yield 4%. Yields fall by 1 point.
| Fund A | ≈ +2% |
| Fund B | ≈ +12% |
Long duration gains more when rates fall — and loses more when they rise.
Example 3 — Zero-coupon vs. coupon bond
StructureA 10-year zero-coupon bond and a 10-year 6% coupon bond.
| Zero-coupon duration | ≈ 10 years |
| Coupon bond duration | Shorter (coupons arrive earlier) |
With all cash at the end, a zero is the most rate-sensitive bond for its maturity. See Zero-Coupon Bond.
What raises or lowers duration
| Aspect | Effect on duration | Why |
|---|---|---|
| Longer maturity | Higher | Cash flows further away |
| Higher coupon | Lower | More cash returned earlier |
| Higher yield | Lower | Distant cash flows weigh less |
| Call feature | Lower when rates fall | Bond may be repaid early. See Callable and Putable Bonds |
How investors use duration
Choosing bond funds
Matching rate risk to comfort and horizon.
Positioning for rates
Longer duration if rates are expected to fall.
Hedging
Matching the duration of assets and liabilities. See Hedging.
Risk reports
Summing rate sensitivity across a portfolio.
Advantages and disadvantages
Advantages
- One number for interest-rate risk.
- Simple rule for estimating price moves.
- Comparable across bonds and funds.
Disadvantages
- Approximate, especially for large rate moves.
- Assumes the whole yield curve shifts equally.
- Changes over time as bonds age and yields move.
- Less reliable for bonds with options.
Going deeper
Read as far as you need. Each level builds on the one before it.
Duration in years
Beginner
Duration is often quoted in years. Roughly, it is the weighted-average time until you receive the bond’s cash flows.
Macaulay vs. modified
Intermediate
Macaulay duration is the weighted-average time to cash flows; modified duration adjusts it for the yield and gives the percentage price sensitivity used in the rule of thumb.
Key-rate duration
Advanced
Real yield curves do not move in parallel. Key-rate durations measure sensitivity to specific maturities on the curve. See 2s10s Spread.
Common mistakes
Comparing funds on yield only
Check duration as well.
Treating duration as maturity
They are related but different.
Using the rule for big moves
Accuracy falls as moves get larger.
Forgetting that duration changes
Recheck it regularly.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Duration measures a bond’s sensitivity to interest rates.
- Price change ≈ −duration × change in yield.
- Longer maturity and lower coupons raise duration.
- Higher duration means bigger gains and losses as rates move.
- It is an approximation; large moves need convexity.
Frequently asked questions
What does a duration of 5 mean?
Is high duration bad?
Where can I find a fund’s duration?
Further learning
- Yield to Maturity
The yield that duration is measured against.
- Interest Rate
What moves bond prices.
- Zero-Coupon Bond
The most rate-sensitive structure.
- Coupon Rate
How coupons affect duration.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.