Bond Duration

Duration estimates how much a bond’s price moves for a 1% change in interest rates.

A real-world scenario

A retiree buys a 30-year bond fund with a duration of 18 because it pays a higher yield. The central bank raises rates by 1%, and the fund falls roughly 18% — a crash-level loss in a supposedly safe investment. A short-term bond fund with duration 2 would have fallen only 2%. The retiree needed the money soon and owned a duration that matched a 20-year horizon. The scenario is why duration, not maturity, is the number to check before buying any bond fund.

Why it matters

It is the standard ruler for interest-rate risk in fixed income.

Common confusion

Higher duration means more price swing when rates move; it is not the bond’s life span.

Worked example

How investors use it

Match duration to your horizon: if you may need the money in two years, hold bonds with duration near two. Laddering maturities keeps cash flowing while controlling rate sensitivity.

Key takeaway

Duration is the ruler for interest-rate risk: it estimates how much a bond or fund falls for each 1% rise in rates, and it is usually far shorter than maturity. A long-duration fund can crash like a stock when rates spike, which is why duration, not maturity, must match your horizon. If you may need the money soon, hold short-duration bonds; if rates are falling, longer duration pays. The number on the factsheet that matters is the duration, not the yield.

Definitions reviewed by the Investing Glossary editorial team.