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

Question

AcadiFi · Accepted Answer

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.

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

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