Talk About Duration

Duration is a measurement of a bond's interest rate risk that considers a bond's maturity, yield, coupon and call features. These many factors are calculated into one number that measures how sensitive a bond's value may be to interest rate changes.

Understanding duration


A bond's price moves in the opposite direction of its yield, as illustrated in the chart below. This inverse relationship between price and yield is crucial to understanding value in bonds. Another key is knowing how much a bond's price will move when interest rates change. To estimate how sensitive a particular bond's price is to interest rate movements, the bond market uses a measure known as duration. Expressed in years, duration is the weighted average of the present value of a bond's cash flows, which include a series of regular coupon payments followed by a much larger payment when the bond matures and the face value is repaid.

How investors use duration to gauge interest rate sensitivity


Generally, the higher a bond's duration, the more its value will fall as interest rates rise, because when rates go up, bond values fall a