Duration
A measure of a bond's sensitivity to interest rate changes — the approximate percentage price change for a 1% move in yield.
Modified Duration = Macaulay Duration / (1 + YTM/n) | %ΔPrice ≈ −Modified Duration × ΔYield
Duration is the most important risk measure for bond investors. It quantifies how much a bond's price changes when yields move. A duration of 7 means the bond's price falls approximately 7% for each 1-percentage-point rise in yield (and rises ~7% for a 1% yield decline).
Two types are commonly used: Macaulay duration is the weighted average time to receive the bond's cash flows. Modified duration (Macaulay ÷ (1 + YTM/n)) is the practical tool — it directly gives the price sensitivity.
Longer-maturity and lower-coupon bonds have higher duration. In a rising rate environment, high-duration bonds (e.g., 30-year T-Bonds) are punished far more than short-duration instruments (T-Bills). Duration is why the "long bond" carries so much rate risk: a 30-year T-Bond with modified duration ~18 falls roughly 18% when its yield rises 1% — and well over 30% on a 2% move (before the convexity offset).
On the desk
Two ‘defensive’ bond positions can still be the same rates trade if both are long duration. The book is one idea.