Economics
Duration vs. Maturity
Quick fact
A zero-coupon bond has a duration exactly equal to its maturity, but for coupon-paying bonds, duration is always less than maturity—sometimes significantly less.
Why this is interesting
You buy a 10-year bond, expecting your money back in a decade. But did you know that if interest rates rise just 1%, your bond could lose more value than a 30-year bond with a later maturity? Why would a shorter-term bond be riskier?
Read the full explanation
Understanding Duration vs. Maturity
Maturity is simple: it's the date when the bond issuer returns your principal. A 10-year bond matures in 10 years. Duration, however, tells you how long it takes, on average, to recover your investment in today's dollars, considering all the coupon payments along the way. Imagine two bonds both maturing in 10 years: one pays a high coupon each year, the other pays none. With the high-coupon bond, you get most of your money back early via those coupons, so you're less exposed to interest rate changes later. Duration captures this: it's a weighted average of the times you receive cash flows, with earlier payments weighted more. So the high-coupon bond has a shorter duration than the zero-coupon bond, even though they mature on the same date. Duration is measured in years but is really a measure of interest rate sensitivity: a duration of 5 years means a 1% interest rate change causes roughly a 5% price change.
A deeper explanation
The mechanism behind duration is the present value of each cash flow. A bond's price is the sum of all future coupons and principal, discounted at the current interest rate. When rates change, all cash flows are discounted differently, but the impact is larger for cash flows received far in the future. Duration mathematically weights each cash flow by the time it is received, divided by its present value. This yields a single number that indicates the approximate percentage change in price for a 1% change in yield (modified duration). Maturity ignores the timing and size of coupons, so it can be misleading: a bond with a maturity of 20 years but a very high coupon may have a duration of only 10 years, meaning it behaves like a 10-year zero-coupon bond. Duration matters because it lets investors compare bonds of different maturities and coupons on a common risk scale. It is essential for constructing bond portfolios, hedging interest rate risk, and understanding why some long-term bonds are less sensitive to rate changes than some short-term bonds with low coupons.