What's the difference between a bond's maturity and its duration? Why does duration matter more for risk?

Excellent question — the distinction between maturity and duration is fundamental to fixed income analysis and is heavily tested on the CFA Level I exam. **Maturity** is straightforward: it's the date when the bond's principal is repaid. A 10-year bond matures in 10 years. End of story. **Duration** is more nuanced. There are two related but distinct concepts: **1. Macaulay Duration** — The weighted average time (in years) until you receive the bond's cash flows, where each cash flow is weighted by its present value. **2. Modified Duration** — A direct measure of price sensitivity to yield changes: Modified Duration = Macaulay Duration / (1 + y/n) Where y = yield to maturity and n = compounding periods per year. **The approximate price change formula:** %ΔPrice ≈ -Modified Duration x ΔYield **Worked Example:** Silverpine Capital holds a 5-year, 6% annual coupon bond priced at par ($1,000). The yield to maturity is 6%. **Calculating Macaulay Duration:** | Year | Cash Flow | PV at 6% | Weight | Year x Weight | |------|-----------|----------|--------|---------------| | 1 | $60 | $56.60 | 0.0566 | 0.0566 | | 2 | $60 | $53.40 | 0.0534 | 0.1068 | | 3 | $60 | $50.38 | 0.0504 | 0.1511 | | 4 | $60 | $47.53 | 0.0475 | 0.1901 | | 5 | $1,060 | $792.09 | 0.7921 | 3.9605 | | **Total** | | **$1,000.00** | **1.0000** | **4.4651** | **Macaulay Duration = 4.47 years** (less than the 5-year maturity because you receive coupons before maturity) **Modified Duration = 4.47 / (1.06) = 4.21** **Now suppose yields rise by 50 basis points (0.50%):** %ΔPrice ≈ -4.21 x 0.50% = **-2.11%** The bond's price would fall approximately 2.11%, or about $21.05. **Why Duration Matters More Than Maturity:** Two bonds can have the same maturity but very different durations: - A **zero-coupon** 5-year bond has Macaulay duration = 5.00 years (no interim cash flows) - A **high-coupon** 5-year bond might have duration of only 4.0 years (more cash received early) The zero-coupon bond is far more sensitive to interest rate changes despite having the same maturity. Duration captures this difference; maturity does not. **Key Relationships:** - Higher coupon rate -> **lower** duration - Longer maturity -> **higher** duration - Higher yield -> **lower** duration To practice bond duration calculations and interest rate sensitivity problems, explore our CFA Level I fixed income question bank on AcadiFi.