Duration

A measure of how much a bond's price moves when its yield changes, and it grows with maturity. The same rate move hits the long end hardest, and the arithmetic explains why.

Price sensitivity to yield

Duration measures the sensitivity of a bond's price to a change in its yield. A bond with a duration of five sees its price fall roughly 5% for a one percentage point rise in yield. The relationship is a straight line only for small moves, but it is enough to compare two bonds at a glance.

Why the long end moves most

A bond's price is the present value of its future payments. The further away a payment is, the more a higher yield discounts it, because the discount compounds over more periods. A long bond's cash flows sit further out, so the same yield change alters its price more.

Duration grows with maturity, so the same move in yields moves the 30yr far more than the 2yr. That asymmetry is why the long end of the yield curve does most of the work when rates shift, and why long-duration portfolios carry more interest-rate risk.

Using it

Duration is a risk measure, not a return measure. It tells you how much a price reacts, not which direction yields will go. Two portfolios with the same duration will lose about the same amount when rates rise, whatever they hold.

One checkable use: before comparing two bond funds, compare their durations. A fund with twice the duration will move roughly twice as much for the same yield change. If a headline says a rate move hit bonds, duration tells you which bonds and by how much.

Related: Yield Curve · Basis Point · Term Premium

Next: Basis Point