Duration
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
A measure of a bond's price sensitivity to yield changes; see Macaulay, modified, and effective duration.
Duration in plain English
Duration measures how much a bond's price will jump around when interest rates change — it's basically the bond's sensitivity dial. A bond is a loan you make that pays you back over time, and its market price moves opposite to interest rates (when rates rise, existing bonds paying the old lower rate become less attractive, so their prices fall). A bond with a duration of 7 will drop about 7% in price if rates rise by one percentage point, while a duration of 2 barely flinches — so longer duration means a bumpier, riskier ride. The different flavors (Macaulay, modified, effective) are just more precise ways of calculating that same sensitivity for different kinds of bonds.
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