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Bonds: Duration is not Maturity

Bonds: Duration is not Maturity

Investing

Bonds: Duration is not Maturity

In simple terms, when a bond matures the seller of that bond pays you the face value of the bond. But the duration of a bond is not the same as its maturity. Duration is a risk measure of the price volatility of a bond to changes in interest rates. The greater the bond's duration the more volatile its price tends to be – which typically means greater risk.

Say investors feel interest rates will rise; they typically buy bonds with lower durations, since that means the bond will be less likely to decrease in value. If investors feel interest rates will fall, they typically buy bonds with higher durations since those bonds may increase at a more rapid rate than other bonds with lower durations.

In short: Maturity is when you receive your money; duration is an evaluation of how volatility bond prices may be in regards to changes in interest rates.

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