Duration

What is Duration?

A measure of how sensitive a bond's price is to changes in interest rates.

Understanding Duration

Duration estimates the percentage change in a bond's price for a 1 percentage point change in interest rates.

Longer maturities and lower coupons mean higher duration and more interest-rate risk.

Formula

\frac{\Delta P}{P} \approx -D \times \Delta y

Here, $D$ is the modified duration and $\Delta y$ the change in yield.

Example

A bond with a duration of 7 loses about 7% of its value if rates rise by 1 percentage point.