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Field Guide › Bonds course › Lesson 2

Bonds course · Lesson 2 of 7

Duration tells you how far a bond price moves.

Two bonds with the same coupon can react very differently to the same change in rates. Duration is the one figure that tells you how much.

EDUCATION, NOT ADVICE · The example bonds. The yields, spreads and inflation rates in this course are examples, not forecasts. The I bond rates and the 2026 tax brackets are real, and the sources say where they come from. A model script calculates every figure. Full disclosures →

Two kinds of duration

Macaulay duration is the average time until you get your cash, weighted by the value of each payment. For the example bond, it is 8.34 years. That is less than the 10 years to maturity, because the coupons arrive earlier.

Modified duration is the percentage change in price for each 1 point of change in yield. For the example bond, it is 8.18. So a rise of 1 point in the yield lowers the price by about 8.18%.

The estimate against the real price

Change in yieldDuration estimateWith convexityActual change
Up 1 point-8.18%-7.78%-7.79%
Down 1 point+8.18%+8.57%+8.58%

Duration gives a straight line, but the real price follows a curve. The curve is called convexity. Because of it, the real loss is smaller than the estimate, and the real gain is larger. Add the convexity term, and the estimate is almost exact.

Longer bonds move more

Maturity, 4% couponMacaulay durationModified durationPrice change, 4% to 5%
2 years1.94 years1.90-1.88%
5 years4.58 years4.49-4.38%
10 years8.34 years8.18-7.79%
30 years17.73 years17.38-15.45%

A 2-year bond loses 1.88% when the yield goes from 4% to 5%. A 30-year bond loses 15.45%. A bond with no coupon has a duration equal to its maturity: a 10-year zero coupon bond has a duration of 10.00 years.

How to use it

Most bond funds publish their duration. Multiply it by the change in rates that you want to test. A fund with a duration of 6 loses about 6% if rates rise 1 point. Use this before you buy, not after.

Key points

  • Modified duration is the percentage change in price for each 1 point of yield.
  • Longer maturities and lower coupons give a longer duration.
  • Convexity makes the real loss a little smaller and the real gain a little larger.
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