Bond Duration.

In plain English

Bond duration is a measure of how sensitive a bond's price is to changes in interest rates, and it is usually written as a number of years. A bond with a duration of 5 will lose roughly 5 percent of its value if interest rates rise by 1 percentage point, and gain roughly 5 percent if rates fall by 1 point. Longer maturities and lower interest payments generally mean higher duration, which means bigger price swings. Duration is not the same as how long until the bond matures, though the two are related.

01Why it matters

If you own bonds or a bond fund, duration tells you how much your investment could drop when interest rates climb, which is the difference between a quiet holding and a painful surprise.

02The math, step by step

Say you own a bond fund with a duration of 6. If interest rates rise by 1 percentage point, the fund's price would fall about 6 percent, so a 10,000 dollar position would drop roughly 600 dollars. If rates instead fell by 1 point, that same position would rise about 600 dollars. The income you earn over time can offset some of that price move, but duration shows the immediate hit.

03What this is NOT

04Receipts

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