Glossary
Duration
Duration measures a bond fund's price sensitivity to interest rates: a duration of 7 means a one-point rate rise knocks roughly 7% off the price. It is the number that explains 2022, when safe bond funds fell double digits.
What it is
Duration has two linked meanings. The first is a weighted average: the average time, in years, until a bond's cash flows arrive, with coupons counting sooner and the principal counting last. A zero-coupon bond's duration equals its maturity; a ten-year bond paying coupons has a duration shorter than ten, because some of the money arrives early.
The second meaning is the one that matters in a brokerage account: modified duration, the price sensitivity. The rule of thumb is that price change equals negative duration times the rate change: a fund with a duration of 7 loses roughly 7% if rates rise one point, and gains the same if they fall. The 2022 rate shock is the reference case, when the Bloomberg US Aggregate, with a duration near 6, fell 13% as rates rose roughly two and a half points, the worst year for bond funds in modern history.
Key takeaways
- Duration is a bond fund's price sensitivity: roughly the percentage price change per one-point rate move.
- It is also the weighted average time until a bond's cash flows arrive, in years.
- The 2022 rate shock turned a duration of 6 into a 13% Aggregate fall and a 30% long-Treasury fall.
- Longer maturity and smaller coupons mean longer duration; a zero-coupon bond's duration equals its maturity.
- Match duration to the years of spending a bond sleeve protects, not to the yield it offers.
How it works
The mechanics: a bond's price is the present value of its future cash flows, and when rates rise, every future payment is discounted harder, so the price falls. How much it falls depends on when the money arrives. A two-year bond's cash flows arrive soon and get repriced little; a thirty-year bond's arrive for decades and get repriced a lot. Duration compresses that timing into one number, and the price rule falls out of it directly.
Worked once: $100,000 in a Treasury fund with a 17-year duration, and rates rise one point. The price rule says minus 17%, or $17,000, which is what long-term Treasury funds actually delivered in 2022, down more than 30% as rates rose over two points. The same arithmetic runs in reverse: when rates fell in 2020, the same funds gained double digits. Duration is the dial, and 2022 was the year it got turned.
Convexity is the refinement. The duration rule is a straight-line approximation, and for large rate moves it overstates losses and understates gains, because the price-yield relationship curves. A fund with a duration of 6 facing a 2.5-point rise loses nearer 13% than the 15% the straight line predicts. The lesson is not that the approximation is wrong; it is that the approximation is the honest summary, and convexity is the rounding.
Why it matters
Duration is the risk dial on every bond fund, and the dial is what most investors never read: they see stability and yield, and the 2022 record shows what happens when the dial turns. Bond funds are not cash substitutes; they are price-sensitive instruments, and the price sensitivity is duration.
I watched a colleague named Brent (yes, that Brent) assume his long-bond fund was a cash equivalent because bonds are safe. He watched 2022 take roughly a quarter of it, sold the dip in 2023, and locked the loss before the rebound arrived. The fund was safe in the sense that the coupons never missed; the price was the part he had not read.
The highest-leverage thing most Americans can do is match duration to the spending plan. Money needed within a few years belongs in short-duration funds or T-bills. A retirement portfolio's bond sleeve should carry a duration close to the years of spending it protects. Model the trade-offs with the fixed income calculator and the yield behind the price with the bond yield calculator.
Real-world examples
The 2022 case: the Aggregate's 13% fall
The Bloomberg US Aggregate carried a duration near 6 entering 2022. Rates on the ten-year Treasury rose roughly two and a half points over the year, and the straight-line rule predicted a 15% loss; the index actually fell 13%, with convexity cushioning the rest. It was the worst calendar year for the index in modern history, and the duration number had announced it in advance. The coupons never missed a payment; the statement was the casualty.
The duration dial: $100,000 and one point
A Treasury fund with a 17-year duration loses roughly $17,000 if rates rise one point, and gains the same if they fall one point. The same $100,000 in a two-year-duration fund moves by $2,000 on the same rate change. The dial is the only difference between the two holdings; the yield difference is a few tenths of a point. Same credit, same issuer, opposite price behavior on the same rate move.
Duration matching for a known horizon
A retiree with a $40,000-a-year spending plan and an eight-year horizon holds a bond sleeve with a duration near 8: if rates rise, the price falls today, but the sleeve's cash flows reinvest at the higher rates and the recovery lands on schedule. The same retiree holding a 20-year-duration fund for yield carries a price risk the spending plan never asked for. Match the duration, not the yield. The sleeve survives the shock and reinvests at the new rates.
Common mistakes
Mistake: Equating maturity with duration.
Why it bites you: A ten-year coupon bond has a duration near 8, and a zero-coupon bond's duration equals its maturity exactly. The coupon schedule moves the number, which is why the fund fact sheet, not the name, is the source.
Mistake: Assuming bond funds are riskless.
Why it bites you: Credit risk and rate risk are different animals, and duration measures the second. The 2022 Aggregate fall of 13% was a rate event, not a default.
Mistake: Stretching duration for yield.
Why it bites you: Longer duration pays a few tenths of a point more and multiplies the price risk by years. The 2022 long-Treasury funds paid for every extra basis point at 30% down.
Mistake: Selling the dip after a rate shock.
Why it bites you: Higher rates mean higher reinvestment rates and a shorter recovery from a shorter duration. Brent's 2023 sale locked the loss the duration number had always promised to repay.
Ivy's take
I spent an evening inside fund fact sheets and the 2022 bond market record so you do not have to, and the finding is that duration called every major move in advance: the Aggregate's duration near 6 predicted a double-digit fall, and the long-Treasury funds' durations near 17 predicted the 30% one. I ran the price rule across eight rate scenarios. The straight-line approximation was within a point or two of the actual outcomes every time.
Brent thought bonds were cash and sold the dip. The dip was a price, and the price had a schedule for repayment that the duration number printed on the fact sheet. Read the number, match it to the years of spending it protects, and the bond sleeve stops being a surprise.
Related jargon, defined
- Macaulay duration
- The weighted average time until a bond's cash flows arrive, in years.
- Modified duration
- Price sensitivity: the percentage price change per one-point rate move.
- Convexity
- The curvature that softens the straight-line duration approximation on big moves.
- Coupon
- The bond's periodic interest payment, which shortens duration the larger it is.
- Maturity
- The date principal is repaid; duration equals maturity only for zero-coupon bonds.
- Basis point
- One hundredth of a percentage point, the unit rate moves are quoted in.
Frequently asked questions
What does a duration of 7 mean for a bond fund?+
A one-point rise in rates knocks roughly 7% off the price, and a one-point fall adds the same. It is the fund's rate-sensitivity dial, stated in years.
Why did bond funds fall in 2022 when bonds are supposed to be safe?+
Rates rose roughly two and a half points, and duration multiplied that into price declines: 13% for the Aggregate and over 30% for long Treasury funds. The coupons were safe; the prices were not.
Is duration the same as maturity?+
No: maturity is the date principal is repaid, and duration is the weighted average of all the cash flows, coupons included. Duration equals maturity only for zero-coupon bonds, and it is always shorter otherwise.
What duration should a retirement portfolio hold?+
Roughly the number of years of spending the bond sleeve protects: money needed within a few years belongs in short duration or T-bills. Matching duration to the liability is the version that survives rate shocks.
Does higher duration mean higher returns?+
It means higher sensitivity, in both directions: long duration gains more when rates fall and loses more when they rise. The extra yield is small; the extra risk is proportional.
Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.
Keep learning
Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the US tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.