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Economy and interest rates · updated October 21, 2026

What is a bond's duration and how does it show interest rate risk

Duration shows how sensitive a bond's price is to changes in interest rates. The simple rule: a bond with a duration of 7 loses about 7% of its price if yields rise one percentage point, and gains about 7% if they fall one point.

Duration formula

Price change=≈ −Modified duration × Change in yield
Modified duration
A number close to the years left to maturity, but smaller, because part of the money comes earlier, from the coupons.
Change in yield
By how many percentage points the market yield rises or falls.

Worked example

You own a bond fund with a duration of 7. Market yields rise 1 percentage point.

7modified duration
+1 ppthe rise in yield
≈ −7%the drop in price

$1,000 invested becomes about $930. If yields fell one point, it would become about $1,070.

How to read duration

Below 3 yearslittle sensitivity to rates
3 - 7 yearsmedium sensitivity
Above 7 yearsvery sensitive to rates

In 2022, when rates rose very fast, ETFs holding US Treasuries with more than 20 years to maturity lost around 30%. Short-term bonds barely moved.

When duration can fool you

The rule is an approximation: for big rate changes, the price moves a little differently from the simple calculation. Duration is not default risk: a very safe government bond can lose a lot because of its duration.

Related terms

Learn it in the Academy

Questions about duration

What duration should I choose?

If you need the money in 1-3 years, pick a short duration, so the price does not jump around. A long duration gains more when rates fall, but loses more when they rise.

Where do I find a bond ETF's duration?

On the ETF provider's page, usually listed as "effective duration" or "modified duration".

These explanations are for information only. They are not a recommendation to buy or sell.

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