duration
A measure of a bond's sensitivity to interest rate changes, representing the weighted average time to receive the bond's cash flows. Longer duration = more price sensitivity.
Example
“The long-duration 30-year Treasury bond dropped 25% in price when rates rose 2%, far more than a short-duration 2-year bond.”
Memory Tip
DURATION = bond's sensitivity to rate changes. Longer duration = bigger price swings when rates move.
Why It Matters
Duration helps investors understand how much a bond's price will change when interest rates move up or down. If you are planning to sell a bond before maturity or need to know the risk of your bond investment, duration tells you how vulnerable your bond is to interest rate fluctuations, which directly affects your investment returns.
Common Misconception
Many people confuse duration with maturity and think they are the same thing. While maturity tells you when a bond will be repaid, duration measures how sensitive the bond's price is to rate changes, which is a different and more useful measure of risk for investors.
In Practice
Suppose you own a bond with a duration of 5 years and interest rates rise by 1 percent. Your bond's price will decline by approximately 5 percent. Conversely, if you own a bond with a duration of 10 years and rates rise by 1 percent, your bond's price will fall by roughly 10 percent, showing how longer duration bonds experience greater price swings.
Etymology
From Latin 'durare' (to last, endure) — how long it takes for the bond's cash flows to be received.
Common Misspellings
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