Duration risk
from class: Principles of Finance Definition Duration risk is the risk associated with the sensitivity of a bond's price to changes in interest rates. It measures how much the price of a bond is likely to fluctuate when there are changes in market interest rates.
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Predict what's on your test 5 Must Know Facts For Your Next Test Duration risk increases with the length of the bond's maturity. Bonds with higher duration are more sensitive to interest rate changes than bonds with lower duration. A bond's duration can be used to estimate its price change for a given change in interest rates. Interest rate increases lead to a decrease in bond prices, and this effect is magnified for bonds with higher duration. Investors use duration as a key metric for managing interest rate risk in their portfolios. Review Questions How does an increase in interest rates affect the price of a high-duration bond? Why do investors pay close attention to the duration of bonds in their portfolio? What does it mean if a bond has a high duration? "Duration risk" also found in:
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