Definition
A measure of how sensitive a bond or bond fund's price is to changes in interest rates, expressed in years. Roughly, a bond with a duration of 5 loses about 5% of its price if rates rise one percentage point and gains about 5% if rates fall by the same amount. Longer maturities and lower coupons mean higher duration.
Why it matters
Duration is the number that explains why bond funds marketed as safe can still fall in value. Matching duration to when you need the money keeps a rate move from arriving at the worst time: a short-duration fund suits cash needed in two years, a long one suits money you will not touch for decades.
Example
An investor holds $50,000 in a bond fund with a duration of 6. If market rates rise by one percentage point, the fund's price drops about 6%, roughly $3,000, even though the fund keeps paying its interest. A short-term fund with a duration of 2 would have dropped only about $1,000.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.