Duration

Duration has two closely related meanings. Macaulay duration is the weighted average time until a bond's cash flows are received, with each payment weighted by its present value. Modified duration turns this into a price sensitivity: a bond's price changes by roughly its modified duration, in per cent, for each one percentage point change in yield, in the opposite direction. Duration rises with maturity and falls with a higher coupon, because a bond that pays more of its value early is less exposed to what happens later. A zero-coupon bond's Macaulay duration equals its maturity.

Duration is the most useful single number for understanding a bond fund's interest rate risk. A fund with a duration of two years will barely move when rates change; one with a duration of fifteen years can fall sharply when rates rise. The approximation works best for small moves, because the true price-yield relationship is curved, which is what convexity measures. A common mistake is to confuse duration with maturity: a bond fund never matures, but it still has a duration, and that figure tells you far more about its likely price swings.