Duration Risk

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Duration risk is the risk that a rise in interest rates will cause the price of a given bond to fall. I won’t belabour you with the maths for calculating the duration of a bond, but you can think of duration as the sensitivity of a bond’s price to a change in interest rates. The longer the time to maturity of a given bond, the more interest rate or duration risk that bond has. Duration risk also changes based on the level of interest rates, which means the relationship between duration risk and a given level of interest rates is not constant. This means that a bond is more sensitive to interest rates when rates rise from 0% to 1% than from 1% to 2%. This is called convexity, or gamma.