Duration

Loading the player...

What is 'Duration'

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

BREAKING DOWN 'Duration'

The duration number is a complicated calculation involving present value, yield, coupon, final maturity and call features. Fortunately for investors, this indicator is a standard data point provided in the presentation of comprehensive bond and bond mutual fund information. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.

It is a common misconception among non-professional investors that bonds and bond funds are risk free. They are not. Investors need to be aware of two main risks that can affect a bond's investment value: credit risk (default) and interest rate risk (rate fluctuations). The duration indicator addresses the latter issue.

RELATED TERMS
  1. Dollar Duration

    Dollar duration measures the dollar change in a bond's value ...
  2. Effective Duration

    A duration calculation for bonds with embedded options. Effective ...
  3. Bond

    A debt investment in which an investor loans money to an entity ...
  4. Empirical Duration

    The calculation of a bond's duration based on historical data. ...
  5. Modified Duration

    A formula that expresses the measurable change in the value of ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change ...
Related Articles
  1. Financial Advisors

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  2. Bonds & Fixed Income

    What Does Duration Mean?

    Duration measures a fixed-income’s sensitivity to changes in interest rates.
  3. Professionals

    Duration

    Understanding duration helps to determine a bond's price volatility.
  4. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  5. Professionals

    Bond Risks and Duration

    NASAA Series 65: Section 16 Bond Risks and Duration. In this section types of bond risks and duration.
  6. Bonds & Fixed Income

    Advanced Bond Concepts: Duration

    The term duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an ...
  7. Bonds & Fixed Income

    Use Duration And Convexity To Measure Bond Risk

    Find out how this measure can help fixed-income investors manage their portfolios.
  8. Professionals

    Duration and Stock Risks

    FINRA/NASAA Series 66: Section 5 Duration and Stock Risks. This section discusses duration and risks associated with investing in the stock markets: systematic, unsystematic, business, regulatory ...
  9. Economics

    The Effect of Fed Fund Rate Hikes on Your Bond Portfolio

    Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk.
  10. Bonds & Fixed Income

    The Basics Of Bond Duration

    Duration tells investors the length of time it will take a bond's cash flows to repay the investor the price he or she paid for the bond. A bond's duration is stated as a number of years and ...
RELATED FAQS
  1. How does duration impact bond funds?

    Learn how duration for a bond fund measures the risk the bond portfolio has to a rise in interest rates, and see how managers ... Read Answer >>
  2. How can I use a bond's duration to predict its return?

    Learn how the concept of duration is used to determine when future cash flows for a bond will equal the amount paid for the ... Read Answer >>
  3. Which is a better metric, modified duration or Macaulay duration?

    Learn why the modified duration is a more useful metric than the Macaulay duration, and understand how the measures are different ... Read Answer >>
  4. How do I use the principles of convexity to compare bonds?

    Read a brief overview of bond duration and bond convexity and why bondholders should take these into consideration when deciding ... Read Answer >>
  5. One way to determine the volatility of a bond is to calculate its duration ...

    The correct answer is a): Duration is the change in the value of a fixed income security that will result from a 1% change ... Read Answer >>
  6. What is the relationship between modified duration and interest rates?

    Learn about modified duration and Macaulay duration, how to calculate the durations of bonds, and how interest rates and ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center