What Is Bond Duration?

Michael Whitman · Trading since 2017, full-time since 2020 · YouTube creator, 137K subscribers · Published 2026-09-14 · Updated 2026-10-27

“Bonds are safe” is the most expensive sentence in personal finance, because it describes a two-year government bill and a thirty-year corporate bond with the same word. Duration is the number that separates them.

How it works

Duration converts a rate move into a price move. A bond with a duration of 7 falls about 7% if rates rise one percentage point, and rises about 7% if they fall one. Duration 2 gives 2%. Duration 17 gives 17%.

That is the entire practical content of it. It is also, underneath, a weighted average of when the bond’s money arrives — which is why it is quoted in years.

Longer bonds have longer duration, because more of the money is further away and therefore more sensitive to the rate used to discount it.

A bigger coupon shortens duration. More of the total is paid earlier, so the average arrival time moves closer and the bond becomes less rate-sensitive. Two bonds maturing on the same day can have materially different durations for this reason alone.

Deep-discount bonds show large gaps: the 1.25% Treasury of May 2050 had a current yield of 2.79% against a 5.43% yield to maturity on 23 Oct 2026.

A worked example

Two bonds, same issuer, same day. One matures in two years, one in thirty. Call their durations 2 and 17.

Rates rise by one percentage point. The short bond falls about 2%. The long bond falls about 17%.

Nothing about the issuer changed. No default, no downgrade, no news. One holding lost a rounding error and the other lost a sixth of its value, and the only variable was a property neither holder necessarily knew.

Put that next to equity risk. Shares are the asset people call risky, and the worst S&P 500 decline since 1950, 56.8%, unfolded over the seventeen months to March 2009. A long bond surrendering a sixth of its value on a single rate move belongs in the same conversation, not in the safe column.

So a long bond is not a low-volatility asset. It is a low-volatility asset only while rates are still.

Where it is used

Matching duration to a horizon is the main use. If money is needed in five years, holding bonds with a duration near five means rate moves damage the price and lift the reinvestment rate in roughly offsetting amounts.

And hedging uses it directly. Offsetting the duration of a holding with an opposite position of the same duration neutralizes the first-order rate move, which is the standard way institutions carry bonds without carrying a view on rates.

Where to find it

Every bond fund publishes it, usually as “average effective duration” on the factsheet, sometimes just “duration.” It is a single number and it is the fastest way to know what a fund actually holds.

The rough shortcut for an individual bond: duration is a little less than maturity for a coupon-paying bond, and equal to maturity for a zero-coupon one. A ten-year bond with a healthy coupon typically lands around seven or eight.

Two figures get used and they answer slightly different questions. Macaulay duration is the weighted average time until the money arrives, in years. Modified duration is the price-sensitivity number — the one that gives the percentage move. In practice a platform quoting “duration” almost always means modified, and the two are close enough that the distinction rarely changes a decision.

What matters is checking it before buying rather than after a rate move. The number is published in advance, it is not an estimate of anything uncertain, and it tells you the size of the loss you are signing up for if rates go the wrong way. Almost nobody looks, which is why the word “safe” keeps getting attached to holdings that can fall by a sixth in an afternoon.

The original data

Use thirty years of fee compounding as the scale: charged alone with no return assumed, 5 basis points a year costs 1.5% of the final balance, 20 costs 5.8%, 75 costs 20.2%, 150 costs 36.5%.

Now compare a single rate move. A duration-17 bond loses about 17% on a one-point rise — in one event. That is roughly what a 75-basis-point annual fee costs over three decades, arriving in an afternoon.

And shortening duration is not free. Selling long and buying short costs a round trip in spreads and dealer markups, so repositioning after the move has already happened pays a cost to lock in the loss.

When it fails

The characteristic failure is buying a long-duration bond fund for safety. The word “bond” carries an assumption of stability, the factsheet’s duration figure is not read, and a fund with an average duration of 15 is bought as the cautious part of a portfolio. One rate cycle later it is down more than the equity allocation it was meant to balance. Nothing went wrong with any holding — the fund did exactly what its duration said it would, to somebody who had not looked.

A second failure is treating duration as exact. It is a first-order approximation and it understates the true move on large changes — which bond convexity covers, and which happens to work in the holder’s favor.

A third is ignoring it in a rising-rate environment, where the number tells you the damage before it arrives rather than after.

A fourth is assuming duration equals maturity. Only a zero-coupon bond has them equal; every coupon shortens the gap.

The question: Rates rose one percent. How far did a ten-year fall?

And a fifth is applying it to a callable bond, where the issuer can end the schedule early and the usual arithmetic stops describing the instrument.

Related

Interest rate covers the variable duration converts into a price move. Yield curve covers which rate is actually moving. And bond convexity covers the error in duration’s approximation.

This page is educational, not financial advice. Test every idea on your own charts before risking money.