What is duration?
Duration is a measure of how much a bond's price changes when its yield changes. The higher the duration, the more the price moves for the same change in yield.
Bond prices and yields move in opposite directions. When yields rise, existing bonds lose value. When yields fall, they gain value. Duration tells you roughly how strong that effect is for a given bond.
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Macaulay and modified duration
There are two common versions, and they answer different questions:
| Measure | What it is | Unit |
|---|---|---|
| Macaulay duration | The weighted average time until you receive the bond's cash flows, with each payment weighted by its present value | Years |
| Modified duration | Macaulay duration adjusted for the yield per coupon period. It gives the percentage price change for a change in yield | Percent per percentage point of yield |
In practice, traders and fund managers mostly quote modified duration. Its standard approximation is:
Percentage price change ≈ − modified duration × change in yield
Present value is covered on Future and present value. Coupons are covered on Coupon (bond).
Worked example
This is a hypothetical case with no real bond behind it. Suppose a bond fund reports a modified duration of D. The State Bank of Pakistan then announces: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
If yields on the fund's bonds rose by about the same amount as the policy rate, the fund's bond prices would fall by roughly D × that change. For example, a fund with twice the duration of another would lose about twice as much in price.
In real markets, bond yields do not always move in line with the policy rate, so this is only a rough estimate. To try real figures, use the tools listed on Calculators.
What affects duration
- Maturity. A longer maturity usually means a higher duration.
- Coupon. A lower coupon means a higher duration, because more of the value arrives at maturity. A bond that pays no coupon has a Macaulay duration equal to its maturity.
- Yield level. A higher yield gives a lower duration, because distant cash flows are discounted more heavily.
Edge cases for experienced readers
- Convexity. The duration formula is a straight-line estimate. For large yield moves it misses the curvature of the price–yield relationship. Convexity is the correction for that.
- Callable and mortgage-backed bonds. Their cash flows change when yields change, so analysts use effective duration. Effective duration is calculated from model prices with yields shifted up and down.
- Floating-rate notes. The coupon resets with market rates, so interest-rate duration is low. Credit risk remains (see Credit spread).
- Portfolios. A portfolio's duration is close to the market-value-weighted average of the durations of the bonds in it.
- Price value of a basis point. This measure converts duration into a money amount per basis point of yield change.
Where you see the term
- Bond fund and income fund factsheets, which often state the portfolio's duration.
- Central bank and treasury reports, bond auction results and news about rate decisions.
- Analysis of government bonds such as the Bund or a Eurobond.
MetaTrader platforms usually do not display duration for bond-related CFDs. You need bond analytics or issuer documents for that. Leveraged CFD trading on rate-sensitive instruments can lose money fast. See Risk management before trading them.
Related terms
Face value · Accrued interest · Basis point · Fundamental analysis · Saving, Investing, Loans · Trading glossary
Frequent questions
What does duration mean in simple words?
Duration measures how sensitive a bond's price is to changes in yields. A higher duration means bigger price swings when rates move.
What is the difference between bond duration and maturity?
Maturity is the date the bond repays its face value. Duration also counts the coupon payments that come earlier, so it is usually shorter than maturity.
What is modified duration used for?
It estimates the percentage change in a bond's price for a given change in its yield.
Is duration exact?
No. It is an approximation that works best for small yield changes. For larger moves, analysts add convexity to the estimate.
Does a high duration mean a bond is better or worse?
Neither. A high duration only describes how sensitive the price is to rates. It is not a quality rating.