Fixed Income
Duration
Duration is expressed in years and captures the timing of a bond's cash flows. The longer the duration, the more the bond's price swings when rates change. A bond with a duration of seven years would fall roughly 7% if yields rose one percentage point.
Longer-maturity and lower-coupon bonds carry more duration and therefore more interest-rate risk. Investors expecting rates to fall may extend duration to capture bigger price gains, while those fearing rate rises shorten it.
Duration is not limited to bonds; the concept explains why long-dated growth stocks behave like long-duration assets, falling hardest when yields climb.
Example
A long-duration bond fund can drop sharply in value during a year when interest rates rise quickly.
Duration — FAQ
What is Duration?
Duration measures a bond's sensitivity to interest-rate changes, estimating how much its price will move for a given shift in yields.
Can you give an example of Duration?
A long-duration bond fund can drop sharply in value during a year when interest rates rise quickly.
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