Duration (finance)

Duration (finance) is a measure of how the price of a fixed-income instrument responds to a change in interest rates. It is used to compare rate risk across bonds and to construct hedges, and is often paired with convexity and the price value of a basis point. Duration-based estimates work best for small, parallel shifts in the yield curve.

Macaulay duration is the present-value-weighted average time to the cash flows and links payment timing to interest-rate risk. Modified duration expresses the first-order percentage price change for a stated compounding convention. When yields vary by maturity, Fisher–Weil duration discounts each payment at its own spot rate; Key rate duration isolates sensitivity at selected maturities; and effective or option-adjusted duration estimates sensitivity for instruments with cash flows that depend on rates.

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