Duration (modified / effective)

Definition

Duration is the weighted average time, in years, until a bond's cash flows are received, weighted by their present value. That basic form is Macaulay duration. Modified duration divides it by one plus the periodic yield and gives a direct price sensitivity: for a small parallel shift in yields, the percentage price change is approximately minus the modified duration times the change in yield. Effective duration is computed by shifting the yield curve and repricing, which correctly handles bonds with embedded options such as callable bonds and mortgage-backed securities. A fund's duration is the weighted average of its holdings.

Why it matters

Duration is the single most useful number for understanding a bond fund's interest-rate risk. A fund with duration 7 will lose roughly 7% if yields rise one percentage point across the curve, before income. Short-duration funds are less rate-sensitive but usually yield less. Combined with credit quality and yield to maturity, it describes most of what differentiates bond funds.

In the API

The headline figure is headlineMetrics.modifiedDuration, a summary label sits in profile.rateSensitivity, and the maturity breakdown in maturity. Example values:

json
{
  "profile": { "rateSensitivity": "medium" },
  "headlineMetrics": { "modifiedDuration": 6.4, "yieldToMaturity": 3.9 },
  "maturity": [{ "label": "5-10 years", "weight": 41.2 }]
}

Common pitfalls

Duration is not maturity: a portfolio with average maturity of 10 years can have duration of 7 because coupons arrive earlier. The linear approximation breaks down for large yield moves (convexity). Fund houses may publish modified or effective duration without saying which; for portfolios without optionality the difference is small.