For example, duration does not tell you anything about the credit quality of a bond or bond strategy. While duration can be an extremely useful analytical tool, it is not a complete measure of bond risk. Investors who are more comfortable with these fluctuations, or who are confident that interest rates will fall, should look for a longer duration. Risk-averse investors, or those concerned about wide fluctuations in the principal value of their bond holdings, should consider a bond strategy with a very short duration. Conversely, if rates fell by 1%, bonds with a longer duration would gain more while those with a shorter duration would gain less. In contrast, a bond with a duration of 10 years would lose 10% if rates were to rise by that same 1%. For example, a bond with a one-year duration would only lose 1% in value if rates were to rise by 1%. If an investor expects interest rates to fall during the course of the time the bond is held, a bond with a longer duration would be appealing because the bond’s value would increase more than comparable bonds with shorter durations.Īs the table below shows, the shorter a bond’s duration, the less volatile it is likely to be. Generally, the higher a bond’s duration, the more its value will fall as interest rates rise, because when rates go up, bond values fall and vice versa. These many factors are calculated into one number that measures how sensitive a bond’s value may be to interest rate changes. What is a bond’s duration?ĭuration is a measurement of a bond’s interest rate risk that considers a bond’s maturity, yield, coupon and call features. How a bond or bond fund's price is likely to be impacted by rising or falling rates is best measured by duration. Most bond investors know that interest rate changes can affect the value of their fixed income holdings.
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