Duration
Private Credit glossary · Underwriting & Credit Analysis
Definition
Measure of interest-rate sensitivity; the weighted-average time to receive a bond's cash flows (Macaulay duration). Modified duration approximates price impact: Δ P ≈ -D_mod · Δ y · P. Floating-rate direct loans have effective duration of only sim 0.1–0.25 years (the time to next reset), which is why direct lending performed strongly through the 2022–2023 rate hiking cycle while fixed-rate high-yield bonds suffered large mark-to-market losses.
Duration in plain English
Duration measures how much a bond's price will swing when interest rates move — think of it as the bond's sensitivity dial. The rough rule is Δ P ≈ -D_mod · Δ y · P: a longer duration means bigger price drops when rates rise, because you're locked into old, now-worse payments for longer. Here's the payoff: floating-rate loans reset their interest every few months, so their duration is tiny (about 0.1–0.25 years) and their prices barely flinch when rates climb. That's exactly why direct lenders sailed through the sharp 2022–2023 rate hikes while people holding long fixed-rate bonds watched their values sink.
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