Duration
Definition
Duration measures a bond's sensitivity to interest-rate changes. Modified duration approximates the percentage price change for a 1 percentage point (100 bp) change in yield: a bond with modified duration of 5 falls roughly 5% if yields rise 100 bps, and rises roughly 5% if yields fall 100 bps.
Macaulay duration, the related concept, is the weighted-average time (in years) to receive the bond's cash flows, weighted by present value. Modified duration equals Macaulay duration divided by (1 + yield per period). Longer maturity, lower coupons, and lower yields all increase duration — a zero-coupon bond's Macaulay duration equals its maturity.
Duration is a first-order (linear) approximation; it works well for small yield moves but misses the curvature captured by convexity.
Why interviewers ask
A staple of markets, FIG, and DCM interviews: 'which bond is more rate-sensitive, a 30-year zero or a 10-year 8% coupon bond, and why?' Interviewers test whether you know the drivers (maturity up, coupon down, yield down → duration up) and can do the quick price-change math. It also connects to asset-liability management questions for banks and insurers.
Related terms
Interviews don't test definitions — they test recall under pressure.
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