Question

In 100 words or less, what does a bond's duration tell an investor about that bond's exposure to risk?

Answer 1

Generally Duration of a bond represents how long it takes for an investor to be repaid the bonds price by bonds total cash flows. It is defined as the weighted average of the payments an investor will receive over a period, discounted to the bonds present value. Duration expressed in years, measures how much a bonds price will rise or fall when interest rate changes. The  longer the duration, the greatest the bonds sensitivity to interest rate changes. Sensitivity of the bond is directly proportionate to the bonds exposure to risk. Duration is not simply the measure of time, duration signals how much the price of your bond investment is likely to fluctuate when there is an up or down movement in interest rates. Just because a bond or bond fund’s duration is low, it does not mean your investment is risk-free. In addition to duration risk, bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factor. Therefore in general the more the bonds duration the more is the bonds exposure to risk.