Fixed Income
What is Bond Duration?
Duration measures a bond's sensitivity to interest rate changes, expressed in years, it shows how much a bond's price will change for a 1% rate move.
Formula
Macaulay Duration = Ξ£ [t Γ PV(Cash Flow_t)] Γ· Bond Price
How to Interpret
Higher duration = more sensitive to rate changes. A bond with 5-year duration loses ~5% in value if rates rise by 1%.
Typical Ranges
Short duration (<3 yrs) for rate uncertainty. Long duration (>7 yrs) when rates expected to fall.