What Is Bond Duration

What Bond Duration Measures

Bond duration quantifies how much a bond's price will change for a 1% move in interest rates, expressed in years. It is not a measure of time to maturity alone, but of the weighted average time until a bond's cash flows are received, adjusted for their present value.

Investors use duration to compare bonds and manage interest rate risk. A bond with a longer duration sees larger price swings when rates move than a bond with a shorter duration. That makes duration a critical tool for balancing yield against volatility in a fixed-income portfolio.

How Duration Is Calculated

Macaulay duration is the basic form. It weights each cash flow — coupon payments and the final principal repayment — by the time it is received and divides by the bond's current price. Modified duration then converts that figure into an approximate percentage price change for a 1% change in yield.

Key factors that push duration higher include lower coupon rates, longer maturities, and lower yields. Zero-coupon bonds, which pay no periodic interest, have a duration equal to their full maturity because all value comes from the single final payment.

Duration vs. Maturity

Maturity is simply the date when the bond repays its face value. Duration is almost always shorter than maturity for coupon-paying bonds, because investors receive cash earlier through regular coupon payments. The gap widens as coupon rates fall and narrows as rates rise.

Using Duration to Manage Risk

Portfolio managers use duration to hedge interest rate exposure. If rates are expected to rise, shortening duration — by selling longer-dated bonds or using derivatives — reduces portfolio losses. If rates are expected to fall, lengthening duration amplifies gains.

A simple rule of thumb: for every year of duration, a bond's price moves roughly 1% for each 1% change in yield. This approximation works well for small rate moves and helps investors size positions and set risk limits with confidence.