Duration

Duration is the point at which a bond reaches the mid-point of its cash flows.

Duration is a measure of risk that is typically applied to bonds. It describes how sensitive a given bond is to movements in interest rates. Think of the relationship between bond prices and interest rates as being like a see-saw: when one side goes up, the other goes down.

Modified duration (which can be found in the fact sheet of most bond funds) tells you the likely percentage change in a bond’s price in response to a one percentage point (100 basis points) change in interest rates. The higher the duration, the higher the “interest-rate risk” of the bond – that is, the larger the change in price for any given change in interest rates. So if a bond has a duration of ten, it indicates that a single percentage point rise in interest rates would cause the bond price to fall by 10% (while a single percentage-point drop in interest rates would cause the bond price to rise by 10%).

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
MoneyWeek

MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.