Duration
A bond's price sensitivity to a 1% change in interest rates.
What is Duration?
Expressed in years, duration estimates the percentage price change for a one-percentage-point move in yields. Longer maturities and lower coupons mean higher duration and more rate risk. It is the single most useful number for explaining bond losses to a client.
Duration: a worked example
A bond with duration 7 falls roughly 7% if rates rise 1%, and rises roughly 7% if rates fall 1%.
More terms in Securities & Instruments
Common Stock
An ownership share in a company, with voting rights and last claim on assets.
Preferred Stock
Equity with a fixed dividend and priority over common, usually without votes.
Bond
A loan to an issuer that pays interest and returns principal at maturity.
Coupon Rate
The bond's stated annual interest as a percentage of par.
Yield to Maturity (YTM)
The total annualized return if you buy today and hold to maturity.
Par Value (Face Value)
The principal repaid at maturity, conventionally $1,000 per bond.
Credit Rating
An agency's assessment of an issuer's likelihood of default.
High-Yield (Junk) Bond
A below-investment-grade bond paying more to compensate for default risk.