In bond investing, what does 'duration' indicate?

Duration is a critical concept in bond investing that serves as a measure of a bond's price sensitivity to changes in interest rates. Specifically, it quantifies how much a bond's price is likely to change in response to a 1% change in interest rates. A higher duration indicates greater sensitivity to interest rate fluctuations, meaning that if interest rates rise, the price of the bond will typically fall more significantly than that of a bond with a lower duration.

This measure encompasses not only the time until maturity but also the timing and size of all cash flows from the bond, making it a more comprehensive reflection of interest rate risk than simply the bond's maturity date or yield. Understanding duration is essential for investors who want to manage interest rate risk effectively in their fixed-income portfolios.