Skip to content

Duration

One-line definition

A first-order measure of a bond or fixed-income portfolio's sensitivity to changes in yield/rates.

Price approximation

dP/P ≈ -D_mod * dy

Interpretation

Modified duration of 5 implies approximately a 5% price decline for a 100 bp parallel yield increase, before convexity and other effects.

Why PMs care

Duration converts rate views and risk limits into portfolio sensitivity.

Common mistakes

  • Using it for a large yield move. The approximation is first-order and degrades quadratically; past roughly 50-100bp the missing convexity term matters.
  • Assuming a parallel shift. Duration prices one number moving the whole curve. A steepening or flattening needs key-rate duration, which is precisely the distinction the two measures exist to draw.
  • Confusing Macaulay with modified duration. Macaulay is a time-weighted average maturity in years; modified is the price sensitivity, Macaulay / (1 + ytm/frequency).
  • Applying rate duration to a spread move. Credit spread sensitivity is spread duration, a separate input — this repo's scenario tool reads a different field for each.