Why are duration and maturity different measures of bond risk?

Put two separate lines on the research card

Write the maturity date on one line and the duration measure on another. Do not label a bond simply five years and assume that this tells you how much its price may move. The cash-flow pattern, coupon, yield and contractual features matter to sensitivity as well.

FINRA distinguishes Macaulay, modified and effective duration. A percentage-change worksheet should identify which measure is being used. Modified duration is a local price-sensitivity measure; effective duration can incorporate modeled changes in cash flows. The name duration alone does not supply all the assumptions needed for a calculation.

A small parallel-yield-change worksheet

Imagine two fictional fixed-cash-flow bonds, each currently worth $10,000 with five years remaining to maturity. Stipulate modified duration of 2.0 for A and 4.0 for B. These sensitivity inputs are invented; they are not calculated from a quoted security. Ignore convexity, time passage, credit changes and transaction costs.

For a small parallel yield increase of 0.50 percentage points, use the first-order approximation: percentage price change ≈ minus modified duration × yield change in decimal form. A gives −2 × 0.005 = −1%, or about −$100. B gives −4 × 0.005 = −2%, or about −$200. The same maturity did not produce the same estimated response.

Keep the approximation label attached

Under the same simplified calculation, a 0.50-percentage-point decline gives approximate increases of $100 and $200. The symmetry comes from the linear approximation. It is not a promise that observed gains and losses will be symmetric, especially for larger moves or contracts whose payments change.

A yield curve can also twist rather than move in parallel. A single duration number cannot identify every exposure to that change. Callable or mortgage-related cash flows may change as rates change. A precise-looking dollar output does not remove the model limitation; rounding it to cents would create an impression of accuracy the inputs do not support.

Duration does not settle the other risk questions

Keep a separate column for default risk, ability to sell, inflation exposure and early-repayment terms. Low duration does not make these risks disappear. Likewise, an intention to hold until maturity does not turn an issuer’s scheduled payment into a certainty or remove the possibility that cash might be needed earlier.

For a fund, distinguish the portfolio sensitivity measure from a single bond’s repayment date. A fund can replace holdings over time; do not assume a displayed duration is a date when all shareholders receive a fixed principal amount. Consult the particular portfolio and contractual disclosures before interpreting either label.

Method, sources, and limits

The two-bond worksheet is original hypothetical arithmetic, checked against FINRA’s educational discussion on 26 October 2026. It does not estimate any named security or fund. The linear, parallel-shift assumption is intentionally narrow, and no duration threshold is presented as suitable for a particular person or market outlook.