What Is Bond Duration and Why Does It Matter?

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is Saturday, February 28th, 2026.

Last week we explored the yield curve and what its shape tells us about economic expectations. Today we tackle a concept I promised at the end of that episode: duration. If you're going to invest in bonds, duration is essential knowledge—and as a bonus, we'll discover how advanced mathematics quietly powers the financial world.

The Question Duration Answers

Let's start with a problem. We know from our January 17th lesson that when interest rates rise, bond prices fall, and vice versa. That inverse relationship is fundamental. But here's what we didn't answer: by how much? If interest rates jump by one percent, does your bond lose five percent of its value? Ten percent? Twenty percent? The answer depends on the bond's duration.

Duration measures how sensitive a bond's price is to changes in interest rates. Economist Frederick Macaulay developed the concept in 1938 while studying interest rates, bond yields, and stock prices for the National Bureau of Economic Research. Macaulay realized that a bond's maturity date alone doesn't tell you how the bond will behave when rates change. A ten-year bond that pays annual coupons behaves differently than a ten-year zero-coupon bond—a bond that pays no interest along the way and simply returns face value at maturity—even though both mature on the same date. Duration captures that difference.

Here's the practical rule: duration tells you approximately how much a bond's price will change for every one percent change in interest rates. If a bond has a duration of seven years, a one percent increase in interest rates will cause its price to drop by approximately seven percent. Conversely, if rates fall by one percent, that same bond rises by about seven percent. Duration is your interest rate sensitivity number.

Why Longer Bonds Move More

Why do longer-duration bonds move more dramatically? Think about what you're buying when you purchase a bond: a series of future cash flows. Some arrive soon as coupon payments, while the big payment—return of your principal—arrives at maturity. Duration calculates when, on average, you receive your money back, weighted by the present value of each payment.

Consider two bonds, each maturing in ten years. The first pays a five percent coupon, sending you interest payments every six months. The second is a zero-coupon bond—no payments until maturity. Even though both mature on the same date, they have different durations. The coupon bond might have a duration of around eight years because you receive meaningful cash flows along the way. The zero-coupon bond has a duration of exactly ten years because all of your future cash flows arrive at year ten.

This difference matters enormously. For a thirty-year zero-coupon bond, you receive nothing until the very end—so duration equals the full thirty years. That's three decades of exposure to interest rate movements, which explains why long-term zero-coupon bonds are among the most volatile fixed-income securities.

The 2022 Wake-Up Call

Now let me show you why this matters. Remember 2022? The Federal Reserve raised interest rates from near zero to over four percent—one of the most aggressive rate-hiking campaigns in history. The results were brutal for bondholders. The broad U.S. bond market fell more than thirteen percent. Ten-year Treasury notes lost over sixteen percent. And thirty-year zero-coupon bonds? They collapsed nearly forty percent—the worst performance for long-dated U.S. bonds since records began in 1754.

Why such carnage? Duration in action. Those long-term bonds had durations stretching beyond twenty years. When rates jumped four percentage points, duration predicted massive losses—and losses indeed occurred. Investors who understood duration weren't surprised. Those who didn't learned an expensive lesson about interest rate risk.

Where Calculus Meets Wall Street

Here's a caveat—and this is where it gets interesting for anyone who thinks advanced mathematics has no real-world application. Duration provides a linear estimate of what is actually a curved relationship between bond prices and interest rates. It's more like an arc than a straight line. Duration works well for small rate changes, but for larger movements, the estimate becomes less precise.

Remember when we said a four percent rise in rates created catastrophic losses? That's true, but duration alone would have overestimated those losses. A thirty-year zero-coupon bond with a duration of thirty years mathematically "predicts" a 120% loss for a four percent rate increase—which is impossible. The actual loss of forty percent, while devastating, was far less.

To get accurate predictions, financial professionals use something called convexity, which accounts for the curvature in that price-yield relationship. Duration and convexity together provide a much better estimate of actual losses. Mathematically, duration is the first derivative of bond price with respect to interest rates, while convexity is the second derivative. If that sounds like calculus, it is! This is calculus in action—working quietly behind the scenes every time a portfolio manager makes a decision. So the next time someone asks why advanced math matters, you have an answer: it helps manage trillions of dollars in the global bond market.

What This Means for You

What does this mean for your investing decisions? Duration helps you match your bond portfolio to your investment horizon and risk tolerance. If you're investing for the long term and can stomach volatility, longer-duration bonds typically offer higher yields as compensation for their greater sensitivity. If you need stability or have a shorter time horizon, shorter-duration bonds provide more protection against rate swings. Many investors reduce portfolio duration—present value cash flow weighted average time to maturity—as they approach retirement.

The yield curve discussion from last week connects here. When the curve is steep, you're being paid more to accept duration risk. When flat or inverted, that extra compensation shrinks or disappears. Understanding duration helps you evaluate whether the trade-off makes sense.

Next week, we'll wrap up our debt securities series by putting everything together: how to build a bond portfolio that serves your financial goals. We'll talk about laddering strategies, how bonds fit alongside stocks, and practical steps for implementing what you've learned.

Until next week... Grace. Dignity. Compassion.