Duration
How sensitive a bond's price is to rate changes. Macaulay Duration is in years; Modified Duration (= Macaulay / (1 + yield/n), where n = coupon periods per year (2 for semi-annual US bonds)) measures % price sensitivity. A modified duration of 7 means roughly 7% price drop per 1% rate increase. Longer duration = more rate risk.
Why it matters
The primary risk metric for bond investors. A bond with modified duration of 7 will lose roughly 7% in price if rates rise by 1%. Longer duration = more interest rate risk but also more potential return if rates fall.
How to read it
Short duration (<3 years): low rate risk, low yield. Intermediate (3-7): moderate. Long (>7): high rate risk, higher yield. In rising rate environments, shorter duration outperforms. In falling rate environments, longer duration wins.
Lessons that use this term
Related terms
10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods
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