![]() The first person gratefully accepted your loan for a period of 5 years, and the second person took it for 10 years. Generally speaking, bonds with shorter maturities carry less risk because they return an investor’s principal more quickly than a long-term bond would. "The higher the duration, the more sensitive the bond is to interest rate changes, and thus, the more prone it is to interest rate risk." Why Is Bond Duration Important? Even though its coupon is greater, the higher duration makes it more prone to interest rate fluctuations. If rates rose 2% in this scenario, the bond would lose 26% of its value! So you see how interest rate changes can really play havoc on bonds with longer terms. Let’s use the 30-year Treasury with 4.5% coupon and a duration of 14.5 years as another example. In the bond world, duration has everything to do with interest rates.įor example, if interest rates rose by 2%, a 10-year Treasury with a coupon of 3.5% and a duration of 8.4 years would fall in value by 15%. ![]() What Is Bond Duration?įirst of all, you shouldn’t confuse the financial term “duration” with a timeframe. But once you understand a few basic metrics, like bond duration, you will find bonds to be a pretty straightforward investment-one that can provide you with a safe and stable stream of income. And because bond prices move in the opposite direction of interest rates, many investors are often left scratching their heads. While fixed-income investments like bonds can help to diversify your portfolio and provide balance during market volatility, bond investing also comes with its own set of complex and somewhat confusing terminology. Investing in bonds is like ordering a cheese pizza: They’re plain, reliable, and maybe even a bit boring. Determining If Bond Investing Is Right for You. ![]()
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