Why is maturity a poor measure of interest-rate risk?
"Longer bonds move more" is true, and it is not precise enough to trade, hedge or report on. Maturity tells you the date of the last payment. It says nothing about when the bulk of your money arrives — and that is what rate sensitivity actually depends on.
Two bonds, identical maturity, different risk
Both mature in 5 years, both yield 5%:
- Bond A pays a 12% coupon — €120 a year. A lot of your money comes back early.
- Bond B pays a 2% coupon — €20 a year. Almost everything arrives at the end.
Their price sensitivities are not the same. Measured properly (next lesson), Bond A's duration is 4.16 years and Bond B's is 4.79 years — Bond B is about 15% more rate-sensitive than Bond A, despite an identical maturity date.
And again at ten years
- A 10-year bond with a 5% coupon, priced at par: duration 8.11 years.
- A 10-year zero-coupon bond: duration 10.00 years.
Same maturity, roughly 23% difference in sensitivity. Anyone budgeting risk by maturity has just mis-sized a position by a quarter.
The right mental model
What matters is the timing-weighted centre of gravity of the cash flows — where the money sits on average, not where the last cheque lands. Picture the payments as weights along a plank marked in years. The point where the plank balances is the bond's real "effective maturity" for rate purposes.
That balance point is what duration measures, and it gives you three rules that follow directly:
- Longer maturity → longer duration. More of the money is further away.
- Higher coupon → shorter duration. Big early payments pull the balance point toward you.
- Higher yield → shorter duration. Heavier discounting shrinks the weight of distant cash flows relative to near ones.
Notice the second rule quietly explains something from Unit 1: a high-coupon bond gives back more money early, which is exactly why it leans harder on the reinvestment assumption. Low price risk and high reinvestment risk are the same trade seen from two sides.
Where the idea came from
Frederick Macaulay asked this question in 1938 while studying US bond and rate history, and produced the weighted-average-time answer that carries his name. Fourteen years later Frank Redington used it to solve an insurer's problem — matching assets to future claims — which is where this course ends up in Unit 3. Duration was invented to solve a practical liability problem, not as a mathematical ornament.
Try it now
- Same issuer quality, same maturity, two different numbers: the high-quality corporate curve is published both as par yields and as spot yields, and at ten years the two disagree. Both for the newest month are below; write down the gap in basis points. The par row prices a bond paying coupons along the way; the spot row prices a single payment at that date. Which of the two instruments should be more rate-sensitive? Commit to an answer before the next lesson gives you the tool.
- Reason it out for an extreme pair: a 30-year zero versus a 30-year 8% coupon bond. Which has its centre of gravity further away, and by roughly how much?
- Write down the three drivers of duration (maturity, coupon, yield) and the direction each one pushes.