Duration, Interest, and Maturity

Investors use duration to predict bond price changes. Duration is a measure of a bond's interest rate risk. Duration is calculated from the weighted average of a bond's coupon rates, principal, and time until these rates are paid. It is expressed as years from a bond's purchase date. As the value of a bond changes, so does its duration. When interest rates change, the price of a bond will change by a corresponding amount related to its duration.

When interest rates change, the price of a bond will change by a corresponding amount related to its duration. For example, if a bond's duration is 5 years and interest rates fall 1 percent, you can expect the bond's prices to rise by approximately 5 percent. Therefore, if you expect interest rates to rise, you want to invest in bonds with lower durations. Low duration means less volatility or price risk.

In general, the shorter a bond's maturity, the less its duration. Bonds with higher yields also have lower durations. A zero coupon bond's duration is the time to its maturity.