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Credit investing glossary

Bond duration

Duration refers to the price sensitivity of a bond, or a portfolio of bonds, to a change in interest rates. It is measured in years.

The higher the duration, the greater the responsiveness of the bond price – or the value of a bond portfolio – to a change in interest rates. There is an inverse relationship between bond prices and interest rates. Expressed differently: the higher the duration of an asset or a portfolio of assets, the higher its interest rate risk.

Consistently at the forefront of credit management
Consistently at the forefront of credit management
Credit investing

Defining sensitivity

Typically, for every year of modified duration, a 100 basis point increase (decrease) in interest rates would result in the price of a bond declining (increasing) by about 1%. Thus, for a bond with a duration of 7 years, if interest rates were to increase by 100 basis points, the price of the bond would drop by 7% (that is, 7 years multiplied by 100 basis points).

Duration is affected by the size and timing of future payments on a bond. For example, the longer the maturity of the bond or the bond portfolio, the higher the duration; and, the higher the coupon, the lower the duration.

A measure of risk

Duration is an important measure of the interest rate risk of a bond or a portfolio of bonds, as it reflects the likely price volatility related to changes in interest rates. The higher the duration of an asset or a portfolio, the higher the interest rate risk and the higher the likely price volatility.
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