Duration
A measure of a bond's sensitivity to interest rate changes — the approximate percentage price change for a 1% move in yield.
Formula
Modified Duration = Macaulay Duration / (1 + YTM/n) | %ΔPrice ≈ −Modified Duration × ΔYield
Duration is the most important risk measure for bond investors. It quantifies how much a bond's price changes when yields move. A duration of 7 means the bond's price falls approximately 7% for each 1-percentage-point rise in yield (and rises ~7% for a 1% yield decline).
Two types are commonly used: Macaulay duration is the weighted average time to receive the bond's cash flows. Modified duration (Macaulay ÷ (1 + YTM/n)) is the practical tool — it directly gives the price sensitivity.
Longer-maturity and lower-coupon bonds have higher duration. In a rising rate environment, high-duration bonds (e.g., 30-year T-Bonds) are punished far more than short-duration instruments (T-Bills). Duration is why the "long bond" carries so much rate risk: a 30-year T-Bond with modified duration ~18 falls roughly 18% when its yield rises 1% — and well over 30% on a 2% move (before the convexity offset).
Related Terms
Basis Point
One hundredth of one percentage point (0.01%) — the standard unit for quoting changes in interest rates, yields, and credit spreads.
BeginnerBond Yield
The return an investor earns by holding a bond — driven by its price, coupon, and time to maturity. Moves inversely with price.
BeginnerCheapest to Deliver (CTD)
The specific deliverable bond a short Treasury-futures holder will choose to deliver because it is the least costly to source net of the invoice received.
AdvancedConvexity
The curvature in the price-yield relationship of a bond — measuring how duration itself changes as yields move, improving accuracy of price change estimates.
AdvancedMaturity
The date on which a bond's principal must be fully repaid to the bondholder, ending the life of the debt instrument.
BeginnerMortgage-Backed Security (MBS)
A bond backed by a pool of home mortgages, passing borrower payments through to investors — and a key target of Fed QE.
AdvancedPrice-Yield Inverse Relationship
The fundamental bond market law: when yields rise, bond prices fall; when yields fall, bond prices rise — always and mechanically.
BeginnerT-Bond
Long-term U.S. Treasury debt with 20- or 30-year maturities — the most sensitive to interest rate changes among Treasuries.
IntermediateTerm Premium
The extra yield investors demand to hold longer-term bonds instead of rolling short-term bills — compensation for duration, inflation uncertainty, and supply risk.
AdvancedYield to Maturity
The total annualized return an investor earns if they hold a bond to maturity — accounting for coupon payments, price paid, and time remaining.
IntermediateZero-Coupon Bond
A bond that pays no periodic coupon, sold at a discount to face value; the entire return is the gap between purchase price and par at maturity.
Intermediate