How duration quantifies a bond's price sensitivity to rate changes — and why longer bonds are riskier in a rising-rate environment.
In this lesson you'll learn
What duration is and the two things it measures
Why duration is shorter than maturity for coupon bonds
The ΔPrice% ≈ −Duration × ΔRate formula and how to apply it
Why zero-coupon bonds carry the highest duration risk
Four practical strategies to reduce duration risk in your portfolio
What Is Duration?
Duration is the most important risk metric in bonds. It measures two things simultaneously:
1
The weighted average time until you receive all cash flows from a bond (coupons + principal)
2
More usefully: the approximate % price change for a 1% change in interest rates
The rule is simple: Duration ≈ % price drop for a 1% rate increase.
Duration 0.5 (T-bill)
~0.5% drop
per 1% rate increase
Duration 5
~5% drop
per 1% rate increase
Duration 10
~10% drop
per 1% rate increase
This is why long-term bonds are described as “risky” even when they carry zero credit risk (e.g., 30-year US Treasuries). The risk is interest rate risk, and duration is how we measure it.
Duration vs Maturity — What's Different?
Maturity is simply when the bond expires. Duration is almost always shorter than maturity for coupon-paying bonds — because you receive cash flows (coupons) before maturity, which reduce your weighted-average wait for your money back.
The one exception: a zero-coupon bond has Duration = Maturity, because you receive nothing until the very end.
Modified Duration — The Practical Formula
Modified Duration = Macaulay Duration ÷ (1 + yield/n). For practical purposes, modified duration ≈ Macaulay duration. The essential formula to memorize:
ΔPrice% ≈ −Duration × ΔRate
A negative sign because prices move opposite to rates
Real-world example: You hold TLT (iShares 20+ Year Treasury ETF), which carries duration ~17. The Fed raises rates by 2% in 2022:
ΔPrice% ≈ −17 × 2% = −34%
This closely matched TLT's actual decline in 2022 — duration is a powerful predictive tool.
Duration Impact Calculator
If your bond fund has duration X and rates rise by Y%, expect approximately −X × Y% change in value.
Duration 3, rates +1%
−3%
Duration 7, rates +1%
−7%
Duration 10, rates +2%
−20%
Duration 17, rates +2%
−34%
Managing Duration Risk
Four strategies to reduce duration risk in your bond portfolio:
1
Invest in shorter-maturity bonds
1–3 year Treasuries carry duration ~1–3 years — minimal rate risk and quick access to cash as they mature.
2
Build a bond ladder
Stagger maturities so some bonds always mature soon. Explained in depth in Lesson 7.
3
Use floating-rate bonds
The coupon resets with market rates, so the price barely moves when rates change — built-in duration protection.
4
Hold to maturity
If you hold a bond to maturity, you receive par back regardless of interim price swings. The loss only materializes if you sell early.
Important insight: Duration risk only materializes if you sell before maturity. If you're a long-term holder, rising rates actually help — you can reinvest your coupons at the higher new rates, improving your total return over the holding period.
Quick Knowledge Check
3 questions · test what you've just learned
1
A bond fund has a duration of 7 years. If interest rates rise by 1.5%, approximately how much does the fund's price decline?
2
Which bond has the LOWEST interest rate risk?
3
You hold a 10-year Treasury bond that has declined 8% in price due to rising rates. You plan to hold it to maturity. What happens?
✓ Key takeaways from Lesson 4
Duration is both a time measure and a price-sensitivity measure — for practical purposes, use it as the latter.
ΔPrice% ≈ −Duration × ΔRate is the most useful formula in fixed income. Memorize it.
Duration is always shorter than maturity for coupon bonds; only zero-coupon bonds have Duration = Maturity.
Long-term bonds carry substantial interest rate risk even with zero credit risk — TLT fell ~34% in 2022.
Duration risk is a paper loss, not permanent — hold to maturity and you receive every coupon plus par value.