Duration explained simply: how interest rates move bond prices

Duration shows how strongly the price of a bond reacts to interest rate changes. The higher it is, the more the price swings. As a rule of thumb, with a duration of 10 the price falls by about 10% when the market rate rises by 1 percentage point. This is an approximation for small rate steps.

Coupon and remaining term determine the reaction to rates

The coupon of a bond stays fixed. The market rate, by contrast, changes constantly. A thought experiment (illustration, freely chosen values): a bond pays 2%, but new bonds pay 5%. The old bond then finds buyers only if its price falls. If the market rate falls, the reverse happens: the old bond with the higher coupon becomes more sought after, and its price rises.

The longer a bond still has to run, the longer it stays tied to the old coupon, and the more strongly the price reacts. For the effect of the remaining term on the price, see the Market Update on government bond yields and falling prices.

Duration explained simply: more than the remaining term

The remaining term is a date. Duration measures something else: the average time until the invested money comes back, including interest payments. Each payment counts with its weight. Anyone who receives a debt back in instalments has their money back earlier, on average, than with a single payment at the end. This is why duration is usually shorter than the term.

Two rules help with classification. The higher the coupon, the lower the duration, because more money flows early. The longer the term, the higher the duration. Two bonds with the same term can therefore have different durations and different interest rate risk.

How does duration become a price change?

The rule of thumb requires the modified duration. It is obtained by dividing the average waiting time by 1 plus the market rate (at a market rate of 2%, that means dividing by 1.02). The rule of thumb is then: the price change in percent is roughly the duration times the change in rates in percentage points, with the opposite sign. An example: with a duration of 10, the price falls by about 10% when the rate rises by 1 percentage point. If the rate falls by 1 percentage point, the price rises by a similar amount.

How well this holds is shown by a separate calculation on an example bond.

At +1 percentage point, the rule of thumb is about 0.5 percentage points away from the exact price, and at +3 percentage points about 3.8.

Limits of the rule of thumb: convexity

The rule of thumb draws a straight line. The real price follows a curve. As with a stretch of road, over a few metres the curve looks almost straight, but over a longer distance it departs from the straight line. In the example, the rule of thumb overstates the loss when rates rise. When rates fall, it understates the gain.

This curvature is called convexity. It shows how duration itself changes when interest rates change. According to UBS, bonds with high convexity react less in a straight line to strong rate moves, and price losses can be partly cushioned.

Where does duration appear on provider product pages?

A factsheet is the short data sheet a provider publishes for a product, such as an exchange-traded fund (ETF) on bonds. As of 12 November 2026: on two iShares (Switzerland) product pages, duration appears under «Portfolio Characteristics» and is called «Effective Duration» there. On one of the two pages, the average remaining term («Weighted Avg Maturity») and the yield to maturity («Weighted Average YTM») appear next to it. How a factsheet can be structured is explained in the article How to read a factsheet.

The example can be read in four steps:

1. Reference date: It shows when the values apply. Duration and yield change with the markets.
2. Duration: Here the provider calls it «Effective Duration», in years. With a duration of 5.0, the rule of thumb gives a price change of about 5% per percentage point of rate change.
3. Remaining term: It differs from duration. On a product page from iShares (Switzerland), too, both figures appear with different values (as of 12 November 2026).
4. Yield to maturity: It is a calculated value that depends on the payments and the price, and it is not a promise.

Credit quality: a second risk alongside interest rates

Duration measures only the reaction to interest rates. It does not measure whether the borrower can make its payments. This credit risk is a separate source of risk, distinct from duration. A bond can therefore have a low duration and still carry a high credit risk. How a borrower's default can play out is shown by the case of Lehman 2008.

Risks and limitations

• Price losses: If interest rates rise, the prices of existing bonds can fall. With a high duration, the losses can be larger. Anyone who sells before repayment bears the price loss.
• Approximation: The rule of thumb applies to small rate steps. The example assumes that the interest rate is the same for all terms, and it is calculated without costs and taxes. Real bonds can deviate.
• Low duration: It does not mean low risk. Credit risk (the borrower does not pay), inflation risk (loss of purchasing power) and call risk (the borrower repays early) remain.
• Currency: Anyone who calculates in francs and holds a bond in a foreign currency also bears the risk of fluctuating exchange rates. How interest rate differences and the franc are connected is shown in the article on the SNB policy rate and the interest rate differential.
• No forecast: Duration describes the reaction to rates under certain assumptions and does not say where rates will move. Past performance is not a reliable indicator of future results.

Conclusion

Explained simply, duration shows how strongly the price of a bond reacts to interest rate changes, and it is not the remaining term. A high coupon lowers it, a long term raises it. In the example with a 2% coupon and 10 years, it is about 9, and the rule of thumb works well for small rate steps but is off by about 3.8 percentage points at +3 percentage points. It does not measure credit risk, and price losses remain possible.