Duration

What it means

The sensitivity of a bond’s price to a change in yield, and equivalently the weighted average time to receiving its cash flows.

The exam angle

Macaulay duration is in years; modified duration is the percentage price change per one percent yield move. Effective duration is the one to use when cash flows are not fixed.

Where it appears in the syllabus

• Fixed IncomeCFA Level I · exam weight 11–14% · Pricing, yield measures, duration, convexity, credit spreads.
• Fixed IncomeCFA Level II · exam weight 10–15% · Term structure dynamics, arbitrage-free valuation, embedded options, CDS.
• Valuation & Risk ModelsFRM Part I · exam weight 30% · VaR and ES, option valuation, bond risk, stress testing, credit and op risk.
• Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.

See it worked through

• Duration and convexity: how good is the approximation?A ten-year bond repriced at four yield shocks, exactly and with the duration and convexity estimates.

There is also a short video: watch it on YouTube.

Related terms

• ConvexityThe curvature of the price–yield relationship — how duration itself changes as yields move.
• Effective durationDuration measured by repricing the bond under small parallel shifts in the benchmark curve, so that changes in cash…
• Forward rateThe interest rate agreed today for borrowing or lending over a future period, implied by today’s spot curve.
• Spot rateThe yield on a single cash flow received at one future date, with no intervening coupons.
• Callable bondA bond the issuer may redeem early, usually when rates have fallen.
• Modified durationThe approximate percentage change in a bond’s price for a one percentage point change in yield.