Duration and Interest Rate Sensitivity

Measuring and managing price volatility

8 min read

How much will my bond's price move when rates change?

Duration Defined

Duration measures a bond's price sensitivity to interest rate changes. Two related concepts work together to help you understand this risk.

1. Macaulay Duration

Weighted-average time to receive cash flows (measured in years). Higher duration = longer effective maturity = more sensitivity.

2. Modified Duration

Macaulay Duration ÷ (1 + yield/n). Directly estimates percentage price change per 1% rate move. Example: Modified Duration of 7 → ~7% price drop if rates rise 1%.

Duration Factors

Factor	Effect on Duration
Longer maturity	Higher duration
Lower coupon	Higher duration
Lower yield	Higher duration

% Price Change ≈ -Modified Duration × Δ Yield

Duration Example

10-year Bund with Modified Duration of 8.5. Interest rates rise by 0.50%. Expected price change: -8.5 × 0.50% = -4.25%

Managing Duration

Match duration to your investment horizon to minimize reinvestment risk
Shorter duration = less volatility, less upside/downside
Longer duration = more volatility, more rate sensitivity

ECB RATE HIKING CYCLE (2022-2023)

2Y Schatz (duration ~2): Price fell ~4% 10Y Bund (duration ~9): Price fell ~18% 30Y Bund (duration ~20): Price fell ~40% The difference in duration directly explained the difference in price moves.

KEY TAKEAWAY

Duration tells you how wild the ride will be. Know your number before rates move.

Loading ...