Guide · Reviewed 6 September 2026
Duration measures interest rate risk: a 5-year duration bond drops ~5% in price if rates rise 1%.
Bond prices and interest rates move inversely. Duration quantifies this relationship. Longer duration = more price sensitivity. Understanding duration helps you choose bonds aligned with your interest rate outlook and risk tolerance.
What is duration?
Duration measures how long (in years) it takes to recover your bond investment through cash flows. More importantly, it estimates price sensitivity to interest rate changes:
Price change ≈ −Duration × Interest rate change
Example: 5-year duration bond, rates rise 1% → bond price drops ~5%.
Duration types
Macaulay Duration
Weighted average time until you receive all cash flows (coupons + principal). Measured in years. A 10-year bond might have 7-year Macaulay duration (you get back half your money before year 10 via coupons).
Modified Duration
Adjusted Macaulay duration; accounts for the bond's yield. This is what you use for price sensitivity calculations. Most commonly cited.
Effective Duration
For bonds with embedded options (callable bonds, mortgage-backed securities). More accurate when option behavior is complex.
Duration and maturity are not the same
- Maturity: When the bond matures (e.g., 10 years from now).
- Duration: Weighted average time to cash flows + sensitivity to rates (e.g., 6 years).
- Example: 30-year mortgage-backed security might have 4-year duration (you get paid down fast via principal prepayments).
High-coupon bonds have lower duration
Higher coupon = more cash back early = shorter duration = less rate sensitivity.
| Bond | Coupon | Maturity | Duration | Rate rise 1% impact |
|---|---|---|---|---|
| Bond A | 2% (low) | 10 years | 9.4 years | −9.4% price drop |
| Bond B | 5% (high) | 10 years | 8.2 years | −8.2% price drop |
| Bond C | 0% (zero-coupon) | 10 years | 10 years | −10% price drop |
Using duration to manage risk
- Expect rates to rise: Choose lower-duration bonds (shorter maturity, higher coupon). Price damage limited.
- Expect rates to fall: Choose higher-duration bonds (longer maturity, low coupon). Price gains amplified.
- Uncertain rates: Mix durations (bond ladder: bonds maturing 1, 2, 3, ... 10 years). Reduces timing risk.
Duration of a bond portfolio
Average duration of all bonds in your portfolio. If you own 50% 5-year-duration bonds + 50% 3-year-duration bonds = 4-year average duration. Portfolio drops ~4% if rates rise 1%.
Convexity: the bonus
Duration is linear; actual bond price change is curved (convex). Longer bonds have positive convexity: when rates fall, price gains exceed linear estimates. When rates rise, price losses are smaller. Convexity favors bond holders.
Takeaway: Duration = interest rate sensitivity. Longer duration = more risk if rates rise, more gain if rates fall. Use it to align your bond holdings with your rate outlook and risk tolerance.