Bond duration
Also known as: bond duration
Duration measures how sensitive a 's price is to changes in interest rates, expressed in years. Despite being expressed as a number of years, duration is not simply the 's time to maturity, it is a weighted average of when a 's cash flows, both and principal, are received, which makes it a more precise measure of interest rate exposure than maturity alone.
As a rule of thumb, a or fund with a duration of seven years will lose approximately seven percent of its value if interest rates rise by one percentage point, and gain approximately seven percent if rates fall by one percentage point. with longer maturities and lower tend to have higher duration, since more of their value is tied up in cash flows received further in the future, which are more sensitive to rate changes than cash flows received sooner. A has a duration equal to its full time to maturity, since its only cash flow is the single payment at the end.
Investors use duration to compare across and funds that may have very different structures, and to build strategies like , where a 's overall duration is set to align with a specific investment horizon or liability. The more precise version of this concept, used to estimate an actual percentage price change, is , which adjusts the calculation slightly to give a direct sensitivity figure.