Bond duration — what it is and why it matters for Polish investors

What is duration?

Duration (time to maturity) is a measure of bond price sensitivity to interest rate changes. It's expressed in years and tells you: "if interest rates rise by 1 percentage point, bond price will fall by approximately X%", where X = duration.

Example

Bond with duration of 5:

• Interest rates rise by 1% → bond price falls by ~5%
• Interest rates fall by 1% → bond price rises by ~5%

The higher the duration, the greater the bond price volatility.

Types of duration

Macaulay Duration

Weighted average time to receive cash flows from the bond (coupons and principal). Expressed in years. For zero-coupon bonds = maturity date.

Modified Duration

Macaulay Duration divided by (1 + YTM/n). Directly measures percentage price change for a 1% interest rate change. This is the most commonly used measure in practice.

Effective Duration

Takes into account options embedded in the bond (e.g., call option). Used for complex bonds.

What affects duration?

A 10-year zero-coupon bond has duration = 10. A 10-year bond with 5% coupon has duration ~7–8.

Duration in bond ETFs

When choosing bond ETFs duration is a key parameter:

• Duration 1–3 → low volatility, low returns (short-term funds)
• Duration 5–7 → moderate volatility (medium-term funds)
• Duration 10+ → high volatility, interest rate speculation (long-term funds)

In rising interest rate environment → choose low duration. In falling rate environment → higher duration provides greater profit.

Practical rule

If you don't know what duration to choose — aim for duration ≤ 5. It's a good compromise between returns and risk for most investors.

How Freenance can help

Freenance helps track the bond portion of your portfolio — ETFs, Polish treasury bonds (SPW), and money market funds. You'll see how different instruments affect overall portfolio risk and returns.

👉 Analyze your bond portfolio in Freenance — freenance.io