What Is Duration?
Duration measures how much a bond's price will move when interest rates change. Although it is quoted in years, the practical interpretation is a sensitivity: modified duration approximates the percentage price change for a one percentage point move in yields.
The years framing comes from Macaulay duration, which is the weighted average time until an investor receives a bond's cash flows. Bonds with longer maturities and lower coupons have higher durations, because more of their value sits far in the future where rate changes bite hardest.
How Duration Works
The core approximation is: Percentage Price Change = -Duration x Change in Yield. The negative sign captures the fundamental inverse relationship between bond prices and interest rates: when yields rise, existing bonds with lower fixed coupons become less attractive and their prices fall.
Duration is only a linear estimate, and for large rate moves the relationship curves. That curvature is called convexity, which analysts layer on top of duration for more precise risk measurement, but duration alone handles most day-to-day estimates well.
Example
Suppose you hold a bond with a modified duration of 7 and market yields rise by 0.5 percentage points, or 50 basis points. The estimated price change is -7 x 0.5 = -3.5 percent, so a 10,000 dollar position would fall to roughly 9,650 dollars.
Compare that with a 2-year note carrying a duration of about 1.9: the same rate move costs it only about 0.95 percent. This is why investors who fear rising rates shorten duration, and those betting on rate cuts extend it.
Why It Matters
Duration is the single most important risk number in fixed income, shaping how pension funds match liabilities, how bond funds position around central bank decisions, and how traders size positions. Portfolio duration targets are the primary lever for expressing a rate view.
On fixed income desks in sales and trading, and in credit research, duration comes up constantly, and interviewers love asking why long-dated zero-coupon bonds are the most rate-sensitive instruments of all. The answer: with no coupons, a zero's duration equals its full maturity.
