Duration is the tool that helps investors gauge these price fluctuations that are due to interest rate risk.
Duration is stated in years. For example, a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. Duration is a weighted measure of the length of time the bond will pay out. Unlike maturity, duration takes into account interest payments that occur throughout the course of holding the bond. Basically, duration is a weighted average of the maturity of all the income streams from a bond or portfolio of bonds. The risk that interest rates will rise causing the yields of bonds to rise and. Duration: Investors can quantify how much the price of a bond will change as the yield changes through duration, The Duration is a measure of the % change in a bonds value changes in yield.  Comparatively, your bond is now much more attractive. An investor will be willing to pay more than $1,000 to earn 6% rather than 5%. Duration is the tool that helps investors gauge these price fluctuations that are due to interest rate risk. Duration is expressed as a number of years from the purchase date. In simple terms, a bond's duration will determine how its price is affected by interest rate changes. A bond's duration will determine how its price is affected by interest rate changes. The reverse is also true. Using the example above, let's assume that when you sell your bond, new bonds are being issued with 5% coupons. Investors can choose between your 6% bond and a new 5% bond. Macaulay duration is a time measure with units in years, and really makes sense only for an instrument with fixed cash flows. For a standard bond the Macaulay duration will be between 0 and the maturity of the bond. It is equal to the maturity if and only if the bond is a zero-coupon bond. The dual use of the word duration, as both the weighted average time until repayment and as the percentage change in price, often causes confusion. Strictly speaking, Macaulay duration is the name given to the weighted average time until cash flows are received, and is measured in years. The idea behind duration is simple. Suppose a portfolio has a duration of 3 years. Then that portfolio’s value will fall about 3% for each 1% rise in interest rates—or rise about 3% for each 1% decline in interest rates. Such a portfolio is less risky than one which has a 10-year duration. It is as simple as that. Suppose a portfolio has a duration of –2 years. The portfolio’s value will rise about 2% for every 1% rise in rates. It will decline about 2% for each 1% declin Measured in years, duration is important information for investors, because a bond with a higher duration also has more interest rate risk (more time for things to go wrong) and higher price volatility, compared to one with a lower duration. In the case of a bond with a duration of 8, a 1% rise in market interest rates would cause the bond to decrease in value 8%. Conversely, a 1% fall in interest rate would cause the bond’s value to increase by 8%. However, higher risk means higher potential reward: A bond with higher duration will have larger gains when interest rates fall than a similar bond with a lower duration. The impact of a change in interest rates on a bond’s price, or its interest rate risk, is measured by the bond’s duration. In the case of a bond with a duration of 8, a 1% rise in market interest rates would cause the bond to decrease in value 8%. Conversely, a 1% fall in interest rate would cause the bond’s value to increase by 8%. DEFINITION of 'Duration'. A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Next Up. Duration Is a Guide to Selecting Bonds. Another risk that bond investors face is interest rate risk--the risk that rising interest rates will make their fixed interest rate bonds less valuable. To illustrate this, let's suppose you bought a $1,000 par value bond with a 10-year maturity and a 6% coupon rate. A bond's duration will determine how its price is affected by interest rate changes. The reverse is also true. Using the example above, let's assume that when you sell your bond, new bonds are being issued with 5% coupons. Investors can choose between your 6% bond and a new 5% bond. For example, suppose a portfolio has a duration of 5 years. That portfolio will appreciate about 5% for each 1% decline in rates. It will depreciated about 5% for each 1% rise in rates. It is as simple as that. Suppose a portfolio has a duration of –2 years. The portfolio’s value will rise about 2% for every 1% rise in rates. It will decline about 2% for each 1% decline in rates.
http://www.investorwords.com/1602/duration.html http://www.treasurer.ca.gov/cdiac/webinars/20120215/presentation.pdf http://news.morningstar.com/classroom2/course.asp?docId=5323&page=5 https://en.wikipedia.org/wiki/Bond_duration http://www.riskencyclopedia.com/articles/duration_and_convexity/ http://learnbonds.com/2453/bond-duration/ http://learnbonds.com/2453/bond-duration/ http://www.investopedia.com/terms/d/duration.asp http://news.morningstar.com/classroom2/course.asp?docId=5323&page=5 http://www.riskencyclopedia.com/articles/duration_and_convexity/
what is duration risk