What Is Duration?

In Chapter 64, we learned that bond prices and interest rates move in opposite directions.¹ Duration is the mathematical tool that tells you exactly how much they will move.²

While it is expressed in years, duration is not a measure of time like maturity; it is a measure of Price Sensitivity.³ It tells you the expected percentage change in a bond's price for every 1% change in market interest rates.⁴

1. The Duration Rule of Thumb

The most practical way to use duration is this simple calculation:

∆Price ≈ -Duration x ∆Interest Rate

• Example: If you own a bond with a 6-year duration and interest rates rise by 1%, your bond’s price will fall by approximately 6%.
• The "Seesaw" Effect: If rates instead fell by 1%, your bond’s price would rise by approximately 6%.

2. The Three Factors That Drive Duration

Why do some bonds move more than others? Duration is built from three variables:

1. Maturity: The longer the bond’s term, the higher its duration.⁵ A 30-year bond is much more sensitive to rates than a 2-year bond.⁶
2. Coupon Rate: The higher the coupon, the lower the duration.⁷ Because you get your money back sooner through large interest checks, you are less sensitive to future rate changes.
3. Yield (Market Rates): Generally, as market yields rise, a bond's duration slightly decreases.⁸

Equiscale Note: A Zero-Coupon Bond is the most sensitive type of bond because its duration is exactly equal to its maturity.⁹ Since there are no coupons to "cushion" the wait, you are 100% exposed to rate changes.¹⁰

3. Macaulay vs. Modified Duration

When browsing a 2026 trading terminal, you will see two types of duration:

• Macaulay Duration (The "Timing" measure): This is the weighted average time (in years) until an investor receives all the bond's cash flows.¹¹ It's used by managers for "immunization"—matching the timing of cash inflows to future liabilities.¹²
• Modified Duration (The "Risk" measure): This is the most common quote.¹³ It is a direct calculation of price sensitivity.¹⁴ It takes the Macaulay duration and adjusts it for the current yield to tell you the percentage price move for a 1% rate change.¹⁵

4. Why Duration Matters in 2026

As of January 2026, the bond market is in a "benign mid-cycle environment". With central banks expected to cut or hold rates steady, managing duration is the key to capturing total returns.

• If you expect rates to fall: You should increase duration (buy long-term bonds) to maximize the price jump when rates drop.¹⁶
• If you expect rates to rise (or want safety): You should shorten duration (buy 1–3 year bonds) to minimize price drops.

Summary: Duration Cheat Sheet