Investor Corner/The asset classes/Debt Concepts
2.2.4 Duration
Duration measures how sensitive a bond's price is to changes in interest rates. A higher duration means a bigger price swing when rates move, in either direction.
A measure of interest-rate sensitivity
Duration is expressed in years, but it is not simply the time left until maturity. It combines the time to each cash flow with its size, giving a single number that estimates how much a bond's price will move for a given change in interest rates. A bond with a duration of 7 will typically fall in price by roughly 7% if rates rise by one percentage point, and rise by roughly the same amount if rates fall.
What drives duration higher or lower
Longer time to maturity generally means higher duration, since more of the bond's value sits further in the future. Lower coupons also raise duration, because a larger share of the total return comes from the final repayment at maturity rather than from steady interim payments. A long-maturity, low-coupon bond will typically have meaningfully higher duration, and therefore higher price sensitivity, than a short-maturity, high-coupon one.
Why this matters when choosing a debt fund
A debt fund's category name usually signals its typical duration range, and that duration is the single biggest driver of how much its price will move when interest rates shift. Matching a fund's duration to your own time horizon and comfort with price swings is one of the more important decisions in debt investing.
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