Duration
Duration · Modified Duration · Bond Sensitivity
A measure of the sensitivity of a bond (or asset) price to interest rate changes — the higher the duration, the greater the price movement when rates change.
What it is
Macaulay Duration: The weighted average time to maturity of all of a bond's cash flows (coupons and principal). Expressed in years.
Modified Duration: The more practical version — tells you by what percentage the bond price changes when the interest rate changes by 1%.
Duration = −(% price change) / (absolute yield change)
Example: A bond with duration 7 years → if yields rise by 1%, the bond price falls by ~7%.
Duration of equities: The principle also transfers to stocks. Growth companies with most of their value in the terminal value (distant cash flows) have high implicit duration — they are more sensitive to interest rate changes, similar to long-duration bonds.
Short duration: companies with a fast payback period, commodity companies, utilities with stable cash flows. Long duration: growth companies (tech, biotech) where a large part of DCF value comes from cash flows 10+ years away.
Why track it
Duration explains why growth stocks fall more than value stocks when interest rates rise. A higher discount rate (WACC) reduces distant cash flows more — and growth companies have more value in the distant future.
For a bond portfolio: lower duration = lower interest rate risk (suitable when rates are expected to rise). Higher duration = higher sensitivity (suitable when rates are expected to fall).
Real-world example
2022 — rate rise of ~4%:
- →30-year US Treasury bond (duration ~20 years): decline ~-40%
- →2-year US Treasury (duration ~2 years): decline ~-4%
- →Nasdaq (high-duration tech stocks): decline ~-33%
- →S&P 500 Value index (low-duration): decline ~-5%
The length of duration was reflected in the real impact of rate changes.