Unit 3 · Level 2 · Bonds & the boring half
Duration: the see-saw's far end
How HARD a bond swings when rates move is called duration, measured in years. Think of the see-saw: a 2-year bond sits near the pivot and barely moves; a 30-year bond sits at the far end and gets launched. The rough rule: price change ≈ minus duration × rate change. Duration 5, rates up 1 point → price down roughly 5%. One number tells you most of a bond's temperament.
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What you get asked
Rates rise by 1 percentage point. Which bond's price falls MORE?
The 30-year bond locks you into the old rate for three decades, so its price must adjust far more. Long maturity means long duration means big swings.
A bond fund has a duration of 7 years. Interest rates rise by 1 percentage point. Roughly what percentage does the fund's price fall?
Price change ≈ −duration × rate change: −7 × 1 = roughly −7%. It's an approximation, but it gets you within shouting distance of reality.
Rates rise 1 percentage point. Match each duration to the rough price move
Duration is symmetric: it measures sensitivity, not doom. Long bonds crash hardest when rates rise and rally hardest when rates fall.
Rough rule: bond price change ≈ − duration × the change in ___.
Interest rates are the input; duration is the amplifier. Check a bond fund's duration in its fact sheet and you know how wild its ride can get.
Who should generally prefer SHORT-duration bonds?
Near the pivot, prices barely wobble, which is ideal when your timeline is short. Long duration is a deliberate bet on rates, not a cosier version of saving. 🐜
The rest of this unit
The see-saw of yields and prices, and the year 'safe' fell double digits.