Duration

Definition

A measure of a bond’s price sensitivity to changes in interest rates, expressed in years. Duration approximates how much a bond’s price will change if interest rates change by a given amount. For each year of duration, a bond’s price will fall (or rise) roughly one percentage point for each one-percent-age-point increase (or decrease) in yield. Thus, a bond with a longer duration will perform worse when rates rise than a bond with a shorter duration; conversely, it will perform better when rates fall. Technically, duration is the weighted average term to maturity of the bond’s cash flows. Thus, it is shorter than maturity for coupon-bearing bonds, which make annual or semiannual payments throughout the life of the bond. Duration is an excellent approximation of price sensitivity when interest-rate changes are small, but it becomes less accurate when rate changes are large.