A bond with a modified duration of 5 falls roughly 5% in price when market rates rise by 1 percentage point (1%p) — and rises about 5% when rates drop by the same amount. Most people know bond prices move opposite to interest rates, but duration is the yardstick that tells you the size of that move in advance. It is also why two bonds with the same maturity can react to rate changes with very different magnitudes.
KB Asset Management describes duration as a measure of a bond price's sensitivity to interest rate changes, expressed in years. In effect, a single number tells you how much a bond swings per 1%p of rate movement.
Duration Turns 'Rate Sensitivity' Into a Number of Years
Duration is quoted in years, but in practice it is used to measure sensitivity, not maturity. A bond pays interest several times and returns principal at the end. Discounting each of these cash flows to present value and taking a weighted average of 'when, on average, the money comes back' is where duration begins.
The later the cash is recovered, the more the bond's price depends on distant future cash — and distant cash is more sensitive to changes in the discount rate. So the longer the duration, the more the price swings for the same rate move. If the discount-rate mechanism is familiar from equities, in bonds that sensitivity is compressed into one number: duration.
How Macaulay Duration Differs From Modified Duration
Duration splits into two. Macaulay duration is the weighted-average recovery period of the cash flows — close to an 'average maturity.' Modified duration goes one step further to estimate the actual price change. The relationship is simple.
- Modified duration = Macaulay duration ÷ (1 + yield to maturity)
- Price change ≈ −modified duration × rate change (in %p)
If Macaulay duration is 5.2 years and the yield to maturity is 4%, modified duration is 5.2 ÷ 1.04 ≈ 5.0 years. So a 1%p rise in rates implies −5.0 × 1 = about −5% in price. Quarterback Asset Management likewise emphasizes that the longer the duration, the larger the price swing for a given rate change.
Duration is less a ruler for maturity than a conversion table showing how many percent a 1%p rate move shakes your bond.
How Many Percent Does a 1%p Move Shift the Price?
With just modified duration and the rate change, you can compute a first-order estimate of the price move yourself. Below is a table applying rate scenarios to bonds with modified durations of 2, 5, and 8 years. Each cell is the expected price change from −duration × rate change.
| Modified duration | Rate +1%p | Rate +2%p | Rate −1%p |
|---|---|---|---|
| 2 yrs (short) | −2% | −4% | +2% |
| 5 yrs (medium) | −5% | −10% | +5% |
| 8 yrs (long) | −8% | −16% | +8% |
For the same +1%p shock, a short bond holds at −2% while a long bond drops as much as −8%. If rates are expected to rise, shorter-duration bonds and funds are more defensive; if you bet on falling rates, longer duration amplifies the upside. But this table is not a 'buy this' signal — it is a ruler for the size of the risk. If the rate call is wrong, the loss scales by exactly that magnitude in the opposite direction.
Why the Same Maturity Can Carry a Different Duration
There is a reason the table uses duration instead of maturity: two bonds with identical maturities can have different durations. Three factors drive it.
- Coupon rate: the more interest a bond pays, the sooner principal is effectively recovered, shortening duration. A zero-coupon bond's duration equals its maturity.
- Maturity: longer means longer duration, though the increase slows as maturity extends.
- Yield to maturity: the lower the rate level, the greater the weight of distant cash, lengthening duration.
One more factor: convexity. The formula price change ≈ −duration × rate change is a straight-line approximation, but the real price–yield relationship is a curve that bows downward. So larger rate moves introduce error — and the error favors the investor. Actual gains when rates fall exceed the straight-line estimate, while actual losses when rates rise are smaller than predicted. In big-move cells like −16% or +8% above, this convexity adjustment grows.
What to Watch
- Check the average duration of any bond fund or ETF you hold or consider, in its factsheet — that number is your expected swing per 1%p.
- When the outlook for policy or government-bond rates shifts, run a profit-and-loss scenario first using duration × expected rate change.
- Two bonds of the same maturity can differ in duration by coupon and yield, so do not judge risk by maturity alone.
- If large rate moves are likely, remember that high-convexity (long, low-coupon) bonds diverge more from the straight-line estimate.