Economics
Duration vs Maturity
Quick fact
A bond's duration is always less than or equal to its maturity; for a coupon bond, duration is less because early coupon payments shorten the average time to receive cash flows.
Why this is interesting
You might think two bonds that mature in 10 years are identical in risk, but their durations could tell a very different story. Why?
Read the full explanation
Understanding Duration vs Maturity
Imagine you lend $100 to a friend who promises to repay the full amount in 10 years. That is the maturity—the exact date you get your principal back. Now suppose another friend offers to pay you $5 every year for 10 years and then the $100 at the end. Both loans mature in 10 years, but the second one returns some money earlier. In bond terms, the first is a zero-coupon bond (maturity = 10, duration = 10). The second is a coupon bond; because you receive payments sooner, its duration is less than 10. Duration, therefore, is the weighted average time it takes to receive all cash flows, giving a truer picture of how long your money is actually tied up and how sensitive the bond is to interest rate changes.
A deeper explanation
Duration quantifies interest rate risk: it measures the approximate percentage change in a bond's price for a 1% change in yield. Mathematically, it is the negative slope of the price-yield curve at a given yield. A higher duration means greater price volatility. The mechanism is that a bond's cash flows (coupons and principal) are discounted at current market yields. If yields rise, the present value of distant cash flows falls more than that of near-term ones. Thus, bonds with longer durations (i.e., more weight on later payments) suffer larger price drops. This concept matters because investors use duration to match liabilities, hedge risks, and choose bonds aligning with their interest rate outlook. For example, a bond portfolio manager aiming to minimize risk from rate changes will ensure the portfolio's duration equals the investment horizon.