What is 'Interest Rate Sensitivity'
Interest rate sensitivity is a measure of how much the price of a fixedincome asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive have greater price fluctuations than those with less sensitivity. This type of sensitivity must be taken into account when selecting a bond or other fixedincome instrument the investor may sell in the secondary market.
BREAKING DOWN 'Interest Rate Sensitivity'
Generally, the longer the maturity of the asset, the more sensitive the asset to changes in interest rates. Changes in interest rates are watched closely by bond and fixedincome traders, as the resulting price fluctuations affect the overall yield of the securities. Investors who understand the concept of duration can immunize their fixedincome portfolios to changes in shortterm interest rates.Inverse Correlation between Fixed Income and Rates
Fixedincome securities and interest rates are inversely correlated. Therefore, as interest rates rise, prices of fixedincome securities tend to fall. One way to determine how interest rates affect a fixedincome security's portfolio is to determine the duration. The higher a bond or bond fund's duration, the more sensitive the bond or bond fund to changes in interest rates. The duration of fixedincome securities gives investors an idea of the sensitivity to potential interest rate changes. Duration is a good measure of interest rate sensitivity because the calculation includes multiple bond characteristics, such as coupon payments and maturity.
Types of Duration Measurements
There are four widely used duration measurements to determine a fixedincome security's interest rate sensitivity: the Macaulay duration, modified duration, effective duration and key rate duration. To calculate the Macaulay duration, the time to maturity, number of cash flows, required yield, cash flow payment, par value and bond price must be known. The modified duration is a modified calculation of the Macaulay duration. It determines how much the duration would change for each percentage point change in the yield. The effective duration is used to calculate the duration of bonds with embedded options. It determines the approximate price decline for a bond if interest rates rise instantaneously by 1%. The key rate duration determines a fixedincome security's or fixedincome portfolio's duration at a specific maturity on the yield curve.
One widely used measure to determine the interest rate sensitivity is the effective duration. For example, assume a bond fund holds 100 bonds with an average duration of nine years and an average effective duration of 11 years. Therefore, if interest rates rise instantaneously by 1%, the bond fund is expected to lose 11% based on its effective duration.

Dollar Duration
Dollar duration measures the dollar change in a bond's value ... 
Key Rate Duration
Holding all other maturities constant, this measures the sensitivity ... 
Modified Duration
A formula that expresses the measurable change in the value of ... 
Effective Duration
A duration calculation for bonds with embedded options. Effective ... 
Duration
A measure of the sensitivity of the price (the value of principal) ... 
Empirical Duration
The calculation of a bond's duration based on historical data. ...

Investing
Use Duration And Convexity To Measure Bond Risk
Find out how this measure can help fixedincome investors manage their portfolios. 
Financial Advisor
Why Bondholders Should Manage Duration Risk
Bonds and bond funds are fixedincome investments, but their duration, combined with changes to interest rates, can lead to price fluctuations. 
Investing
What Does Duration Mean?
Duration measures a fixedincomeâ€™s sensitivity to changes in interest rates. 
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. 
Investing
Duration is On My Mind
In this explainer on duration, we talk about some of the risks and opportunities in a potentially rising interest rate environment. 
Investing
Immunization Inoculates Against Interest Rate Risk
Bigmoney investors can hedge against bond portfolio losses caused by rate fluctuations. 
Investing
Calculating the Macaulay Duration
The weighted average term to maturity of the cash flows from a bond. 
Investing
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 ... 
Financial Advisor
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. 
Investing
Whatâ€™s the Difference Between Duration & Maturity?
We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.

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 >> 
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 >> 
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 >> 
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 >> 
What is the average profit margin of a company in the chemicals sector?
Learn more about the Macaulay duration and the modified duration, how to calculate a bond's Macaulay duration and modified ... Read Answer >> 
What does the Macaulay duration indicate about a bond?
Learn how the Macaulay duration shows the relationship between interest rate changes and the price of bonds, and see how ... Read Answer >>