What is bond duration?

Bond duration is a fundamental concept in fixed-income investing. It measures the sensitivity of a bond’s price to changes in interest rates by calculating the weighted average time it takes to receive all the interest and principal payments. The longer the duration, the greater the interest sensitivity. Bond prices change with interest rates.

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.

What factors affect a bond's duration?

Time to maturity and a bond’s coupon rate are two factors that can affect a bond’s duration. Macaulay duration estimates how many years it will take for an investor to be repaid the bond’s price by its total cash flows. Modified duration measures the price change in a bond given a 1% change in interest rates.