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Credit investing glossary

Bond duration

Bond duration measures the sensitivity of the price of a bond to changes in interest rates, and is thus a measure of the interest rate risk of a bond or of a portfolio of bonds. The higher the duration of a bond, the higher its sensitivity to changes in interest rates.

Duration is measured in years. As an example, if a bond has a duration of five years, then, if its yield declines by 100 basis points, its price will increase by about 5%. 

There are various ways of calculating bond duration, and a range of factors that influence its magnitude. The size of the bond coupon payment is one such factor: the higher the coupon, the lower the duration; the smaller the coupon, the higher the duration. In the case of bonds with no coupons, the bond duration is equal to the maturity of the bond.

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Another factor that influences the duration of a bond is its maturity: a long-dated bond has a higher duration than a short-dated bond. Moreover, the duration of a bond shortens over time, as it approaches maturity.



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