How duration affects the price of your bonds Generally, the higher the duration of a bond or a bond fund (meaning the longer you need to wait for the payment of coupons and return of principal), the more its price will drop as interest rates rise. It's lost some appeal (and value) in the marketplace.ĭuration is measured in years. So if you own a bond that is paying a 3% interest rate (in other words, yielding 3%) and rates rise, that 3% yield doesn't look as attractive. When interest rates rise, prices of traditional bonds fall, and vice versa. The key point to remember is that rates and prices move in opposite directions. It's almost impossible to hear or read about the bond markets without coming across the word "duration." But what does this term mean? And how does it affect your savings?įirst, it's important to understand how interest rates and bond prices are related. Understanding bond duration can help investors determine how bonds fit in to a broader investment portfolio. In more technical terms, bond duration is measurement of interest rate risk. Bond duration is a way of measuring how much bond prices are likely to change if and when interest rates move.
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