Duration is a measure that helps estimate how much a bond's price may move when interest rates change.
What it means
Duration is often shown as a number of years, but it is not the same as the date when the bond pays back principal.
A higher duration usually means a larger price move when rates change. Bond prices generally move in the opposite direction from interest rates.
A simple example
A bond fund has a duration of 6. A rough estimate says its price may fall about 6% if interest rates rise by one percentage point. On $100,000, that price change would be about $6,000. If rates fall by one point, the estimated price move goes the other way.
This is only a rule of thumb. Interest earned by the fund, changes in credit quality, and larger rate moves can make the actual total return different. Duration helps compare interest-rate sensitivity; it does not predict the exact loss or tell you when a bond fund will recover.
What people often miss
Duration is an estimate, not a promise. Credit risk and other changes also move bond prices.
A fund does not mature on one date the way a single bond does.
Three questions worth asking
- What is the duration?
- Is this a single bond or a bond fund?
- What credit and interest-rate risks am I taking?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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