We’ve seen that rising rates push bond prices down. But not all bonds move the same amount. A short bond barely flinches; a long bond can swing hard. The measure of that sensitivity is duration.
Interest-rate risk
Interest-rate risk is the risk we just met: the chance a bond loses value because market rates rose. Every fixed-rate bond has it. But its size depends on how far away the bond’s payments are.
Why longer bonds move more
Think about what changes when rates rise. All of a bond’s future payments get repriced to the new, higher going rate. A 1-year bond has only a couple of payments close at hand, so there’s little to reprice — its price barely moves. A 30-year bond has decades of payments stretching into the future, and discounting all of them at a higher rate knocks a big chunk off the price.
Same +1% move in rates: a 1-year bond might drop ~1%, while a 30-year bond could drop ~15%.
Duration: the sensitivity number
Duration puts a number on this. Roughly, it’s how much a bond’s price moves for a 1% change in rates:
- A duration of 2 means a ~2% price move per 1% rate change.
- A duration of 15 means a ~15% move — far more sensitive.
Longer maturity (and lower coupons) push duration up. It’s the single best gauge of how bumpy a bond will be when rates shift.
Managing it
- Hold to maturity — price swings along the way don’t matter if you wait for the face value.
- Stay shorter — short-duration bonds give up some yield for much smaller swings.
- Ladder — spread money across maturities so some bonds repay (and reinvest at new rates) regularly.
The takeaway
Interest-rate risk is the price-falls-when-rates-rise risk, and duration measures how big it is. Longer-dated bonds have higher duration and swing more for the same rate move — so duration is the dial you watch to control a bond’s bumpiness.