Duration
Duration measures how sensitive a bond's (or bond fund's) price is to changes in interest rates. It's expressed in years, but it's really a sensitivity measure, not just time to maturity.
Why it matters
- Longer-duration bonds see larger price swings when interest rates change.
- Short-duration bonds are more stable but generally offer lower yields.
- Duration helps investors understand how much interest-rate risk a bond or bond fund carries.
Simple example
- A bond fund with a duration of 7 years would be expected to fall roughly 7% in price if interest rates rose by 1 percentage point (all else equal).
- A short-term bond fund with a duration of 2 years would be expected to fall only about 2% under the same rate increase.