---
title: "Duration"
url: "https://mahouse.world/glossary/duration"
type: "glossary term"
topic: "Fixed income"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Duration

Duration measures how much a bond's price — or a portfolio's, or a bank's balance sheet's — changes when interest rates move: a duration of five means a one-point rise in rates cuts the value by about 5%. It is the weighted average time until the cash flows arrive, and it explains why long bonds fell 30% in 2022 and why Silicon Valley Bank failed.

**Also known as:** Bond duration, Interest-rate duration, Modified duration

## Key facts

- **Used at:** bond portfolio management, bank and insurer asset-liability management, treasury hedging, the pricing of fixed-rate lending, and the stress tests regulators run on interest-rate risk in the banking book
- **Binding:** in regulation — supervisors set limits and disclosure on a bank's interest-rate sensitivity; in mandates — a bond fund's duration target
- **Typical values:** a two-year government bond has a duration near 1.9; a ten-year near 8.5; a thirty-year near 20; a floating-rate loan near zero; a portfolio's duration is the weighted average of its holdings'
- **Typical arithmetic:** price change ≈ −duration × change in yield; a duration of 8.5 and a 3-point rise in yields is a fall of about 25%, which is what happened to ten-year bonds bought in 2020 and marked in 2023
- **Parties:** bond investors, bank treasurers and risk committees, regulators, and the depositors and shareholders who bear the loss when the mismatch is not hedged

## How duration works in practice

A bond paying 2% for ten years is worth par when rates are 2%. If rates rise to 5%, a new bond pays 5% and the old one's fixed 2% is worth less — about 23% less, which is what a duration of eight predicts. The longer the cash flows are deferred, the greater the sensitivity, so duration rises with maturity and falls with coupon. A portfolio manager who expects rates to rise shortens duration; one who expects them to fall lengthens it; a treasurer hedges it with swaps so that the balance sheet is indifferent.

A bank is a duration mismatch by design: deposits withdrawable on demand fund loans and bonds that run for years. The mismatch is managed by pricing (deposits reprice with rates, which the bank expects), by hedging, and by holding enough liquidity that a run does not force the long assets to be sold at a loss. Silicon Valley Bank in 2023 held tens of billions of long-dated bonds bought at 1–2% yields, unhedged, funded by deposits from venture-backed companies; when rates rose the bonds lost value, when depositors noticed they withdrew, and the bonds were sold at the loss the duration had predicted. The failure was arithmetic that a duration number on one page would have shown.

For a fintech lender the same risk is smaller and the same: fixed-rate loans funded by a floating warehouse line have duration on one side and none on the other, and a rate rise squeezes the margin unless it was hedged.

## Example

A fintech lender holds €300m of three-year fixed-rate consumer loans at 9%, funded by a €250m warehouse line at the base rate plus 4% — 6% when the base rate is 2%. Margin: 3 points, €9m a year. The loans' duration is about 1.6; the funding's is near zero. The base rate rises to 4.5% over a year: funding costs 8.5%, the loans still pay 9%, and the margin is 0.5 points — €1.5m — until the loans run off and are replaced at new rates. A swap that fixed the funding cost at signing would have cost €0.4m a year; the lender's board had declined it as "insurance against something that won't happen". The loss of margin over two years is €14m.

## Common mistakes

- Reading duration as maturity; a high-coupon or amortising instrument has a duration well below its term.
- Holding long assets against short funding without a hedge or a liquidity plan — the 2023 bank failures in one sentence.
- Fixed-rate lending funded by floating lines with no swap, because rates "won't rise".
- Ignoring convexity for large rate moves; duration is a first approximation.
- Treasury reports that show the assets' duration and not the liabilities'.

## Related terms

- [Yield Curve](https://mahouse.world/glossary/yield-curve.md)
- [Risk-Free Rate](https://mahouse.world/glossary/risk-free-rate.md)
- [Treasury Management](https://mahouse.world/glossary/treasury-management.md)
- [Regulatory Capital](https://mahouse.world/glossary/regulatory-capital.md)
- [Credit Rating](https://mahouse.world/glossary/credit-rating.md)
- [Tokenised Deposits](https://mahouse.world/glossary/tokenised-deposits.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov