Glossary / Markets

Duration

Duration measures how much a bond's price moves for a one percent change in interest rates, so a bond with a duration of eight falls roughly eight percent when rates rise one percentage point.

It rises with maturity and falls with coupon. A thirty year zero coupon bond has enormous duration; a two year bond has very little.

It is the reason a portfolio described as safe because it holds bonds can lose double digits in a year.

Where people get it wrong

Assuming bonds are the low risk part by definition. The risk is duration, and a long duration bond fund is a rates bet, not a cash substitute.

The framework behind it The three fund portfolio, and why it breaks for expatriates sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Yield curve The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk. Drawdown A drawdown is the fall from a portfolio's peak value to its trough, expressed as a percentage, and recovering from one requires a larger percentage gain than the loss because the gain is calculated on a smaller base. Real yield Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning.

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