Duration
The weighted average time, in years, to receive a bond’s cash flows — and a guide to how sensitive its price is to interest rates.
Duration — formally Macaulay duration — is the average time until you receive a bond’s cash flows, with each payment weighted by its present value. A bond that pays everything at the end, a zero-coupon bond, has a duration equal to its maturity. A bond paying regular coupons has a shorter duration than its maturity, because some cash comes back earlier.
Why it matters
Duration is the most useful single number for understanding interest rate risk. The longer the duration, the more a bond’s price — or a debt fund’s NAV — tends to move when interest rates change. It also gives a practical rule of thumb: matching a debt investment’s duration to when you need the money reduces the chance that rate changes upset your plan.
How to read it
- Higher coupons shorten duration; longer maturities lengthen it.
- For a direct estimate of price sensitivity, use the closely related modified duration.
- For a debt fund, the factsheet figure is a portfolio average that changes as the manager buys and sells.
Common misconceptions
- “Duration is the same as maturity.” Only for zero-coupon bonds. For most bonds and debt funds, duration is shorter than average maturity.
- “Short duration means no risk.” Short duration reduces interest rate risk, not credit risk.
In India: Several debt fund categories are defined by the range of Macaulay duration their portfolios must stay within, which is why duration features prominently in debt fund factsheets.
Formula
Macaulay duration = Σ [t × PV(Cash flowₜ)] ÷ Bond price, where t is the time in years to each cash flow and PV is its present value at the bond’s yield
Worked example
For illustration, assume a 3-year bond with face value ₹1,000 and an 8% annual coupon, priced at ₹1,000 (a yield of 8%). The present values of its cash flows are ₹74.07 in year 1, ₹68.59 in year 2 and ₹857.34 in year 3. Duration = (1 × 74.07 + 2 × 68.59 + 3 × 857.34) ÷ 1,000 ≈ 2.78 years.
Figures are for illustration only — not a forecast or a recommendation.
Related terms
Modified duration
An estimate of how much a bond’s price changes, in percent, for a one percentage point change in interest rates.
Interest rate risk
The risk that a bond’s price falls when market interest rates rise — larger for bonds and debt funds with longer duration.
YTM
Yield to Maturity
The annualised return on a bond bought at today’s price and held to maturity, if every payment arrives as promised and coupons are reinvested at that rate.
Maturity
The date on which a bond, deposit or other fixed-term investment ends and its principal is due to be repaid.
Zero-coupon bond
A bond that pays no periodic interest; it is bought at a discount to face value and repays the full face value at maturity.
Debt
Lending money in return for interest — through bonds, deposits or debt mutual funds — with returns driven mainly by interest rates and credit quality.