Bond duration and maturity are two key concepts in fixed-income investments, but they measure different things:
1. Bond Maturity
• Definition: The time remaining until the bond’s principal (face value) is repaid to the bondholder.
• Units: Measured in years.
• Key Role: Indicates when the bondholder will receive the final payment.
• Fixed Value: It does not change after the bond is issued (unless the bond is callable or convertible).
• Purpose: Used for understanding the time horizon of the investment.
2. Bond Duration
• Definition: A measure of a bond’s sensitivity to changes in interest rates. It is the weighted average time it takes to receive all cash flows (interest and principal).
• Units: Measured in years but reflects price sensitivity.
• Key Role: Indicates the percentage change in a bond’s price for a 1% change in interest rates.
• Example: If a bond has a duration of 5 years, its price will decrease by approximately 5% if interest rates rise by 1%.
• Dynamic Value: Changes over time as the bond approaches maturity and as market conditions evolve.
• Purpose: Helps assess interest rate risk and manage portfolios.
Comparison
Aspect Duration Maturity
Measures Interest rate sensitivity Time until final payment
Focus Weighted cash flow timing Final repayment date
Changes Over Time Yes (affected by cash flows) No (fixed at issuance)
Relevance Risk management, pricing Investment time horizon
In short, maturity is a simple calendar date concept, while duration is a more complex measure tied to the bond’s cash flows and interest rate risk.
