Bond Investing: What is Duration?

How can you prepare for an interest rate rise? Bond investors use duration to bet on rising or falling rates, but what exactly is duration?

Jose Garcia Zarate 31 July, 2015 | 11:18AM
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Jose Garcia Zarate: The long period of historically low interest rates in the U.S. and the U.K. seems to be coming to an end. Increasingly, we are hearing from central bankers that normalization of rates is high on the cards.

The value of fixed income holdings is strongly exposed to changes in interest rates. Rising interest rates drive bond prices lower while falling interest rates drive bond prices higher. Duration is the measure of sensitivity of fixed income assets to changes in interest rates. It is expressed in the number of years. The bigger the number, the greater the sensitivity to an interest change.

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Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe