Bond Duration
What Is Bond Duration?
Bond duration is a measure of how sensitive a bond’s price is to changes in interest rates. It estimates how much the value of a bond may rise or fall when interest rates change.
Duration is often expressed in years.
Why It Matters
Bond duration helps investors understand interest rate risk. Bonds with longer durations tend to be more sensitive to interest rate changes, meaning their prices may fluctuate more.
Investors use duration to manage risk in fixed-income portfolios.
How Bond Duration Works
Several factors affect bond duration, including:
- the bond’s maturity date
- the coupon rate
- interest rate levels
Generally:
- longer-term bonds have higher duration
- lower coupon bonds have higher duration
When interest rates rise, bond prices typically fall.
Bond Duration vs Maturity
- Maturity refers to when a bond repays its principal.
- Duration measures sensitivity to interest rate changes.
FAQs About Bond Duration
Why does duration matter?
It helps investors manage interest rate risk.
Do longer bonds have higher duration?
Generally yes, because their payments occur further in the future.
Can duration change over time?
Yes, duration typically decreases as bonds approach maturity.
Related Terms
