How does duration affect bond investments?

Duration is a key concept in fixed-income investing, as it provides insight into how sensitive a bond's price is to changes in interest rates. Specifically, duration measures the weighted average time until a bond's cash flows are received, and it reflects the bond's price volatility in response to interest rate movements.

When interest rates rise, bond prices typically fall, and the extent of this price change is influenced by the bond's duration. A bond with a longer duration will generally experience a greater price decline when interest rates increase compared to a bond with a shorter duration. Conversely, if interest rates fall, longer-duration bonds will rise more sharply in price.

This characteristic makes duration a vital tool for investors seeking to manage interest rate risk. By understanding duration, investors can better position their portfolios in response to anticipated market movements and make informed decisions about bond investments.