Duration
Duration measures the sensitivity of a bond's price to changes in interest rates, expressed in years. It represents the weighted average time until cash flows are received.
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Definition
Duration measures the sensitivity of a bond's price to changes in interest rates, expressed in years. It represents the weighted average time until cash flows are received.
Use case
Used in fixed income workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Duration
Modified duration estimates the percentage price change for a 1% change in yield. For example, a bond with 5-year duration will fall approximately 5% if rates rise 1%. Convexity provides a second-order adjustment for larger rate moves. Longer maturity and lower coupon bonds have higher duration and greater interest rate risk.
Example: A 10-year Treasury bond has modified duration of 8.5 years. If yields rise from 4% to 4.50% (50 basis points), the bond's price falls approximately 8.5 × 0.50% = 4.25%.