What is a bond duration?

Duration can also measure the sensitivity of a bond’s or fixed income portfolio’s price to changes in interest rates. A bond’s duration is easily confused with its term or time to maturity because certain types of duration measurements are also calculated in years.

How does duration affect a bond's price?

Duration is used to quantify the potential impact that these factors will have on a bond’s price because both factors will affect a bond’s expected YTM. For example, if a company begins to struggle and its credit quality declines, investors will require a greater reward or YTM to own the bonds.

Why is duration important in a bond portfolio?

Duration helps investors grasp price fluctuations that are due to interest-rate movements. Essentially, bond prices have an inverse relationship with interest rates. When Morningstar analysts refer to duration in the context of an overall bond portfolio, they are most likely referring to average effective duration.