A bond maturity date does not measure price sensitivity

A repayment date tells you when an issuer owes principal. It does not tell you exactly how today's bond price would change if yields rose. Duration supplies a different kind of information, and its specific definition belongs beside the number.

FINRA distinguishes maturity and duration and identifies coupon, yield and call features among the factors affecting sensitivity. The Federal Reserve Bank of St. Louis explains modified duration as a local price-change approximation.

Supply two duration inputs

Use two invented option-free fixed-rate bonds. Each position has a current value of $8,000, and each matures in eight years. Their supplied modified durations are 3 and 6 years. These are given sensitivity inputs; the maturity date alone has not calculated them.

For this small-move comparison, approximate fractional price change as negative modified duration multiplied by the change in yield in decimal form. Suppose each yield rises by 0.25 percentage points, or 25 basis points. The decimal change is 0.0025.

• Duration 3: −3 × 0.0025 = −0.0075, approximately a 0.75 percent decline. The $8,000 position becomes about $7,940.
• Duration 6: −6 × 0.0025 = −0.015, approximately a 1.5 percent decline. The position becomes about $7,880.

This is an immediate repricing illustration with other factors fixed. It includes no time passing, coupon receipts, fees, taxes or default. The $60 and $120 estimated declines are not complete annual investment returns.

Understand the approximation

For a separate direction check, a 25-basis-point yield decline would give approximate increases of the same sizes under this linear method. Exact price changes need not be symmetric. Bond prices have a curved relationship with yields, and a larger move makes the limitations of a linear estimate more consequential.

The example also assumes a specified yield change for each bond. It does not model every point on a changing yield curve. A callable bond may have a changing expected cash schedule. Read whether a reported figure is modified duration, effective duration or another measure before using a formula intended for one of them.

Separate price exposure from other risks

An investor planning to sell soon faces a different cash question from one able to hold an individual bond to maturity. Neither plan removes credit risk or establishes that every promised payment will arrive. Low duration alone does not settle inflation, reinvestment or liquidity exposure.

The bond cash-return walkthrough follows price paid and promised receipts. Here, maturity is unchanged while estimated market values move. Keep the contractual date and the sensitivity calculation in separate sentences.

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