How to Calculate the Interest-Rate Sensitivity on Bonds

A measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive will have greater price fluctuations than those with less sensitivity. This type of sensitivity must be taken into account when selecting a bond or other fixed-income instrument that the investor may sell in the secondary market.
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Duration measures the interest rate sensitivity of a bond to a 1 percent change in the rate. For example, a $100,000, 10-year bond that pays a 5 percent coupon each year has a duration of 8. If interest rates rise from 5 to 6 percent, the current value of that bond will fall by 8 percent. Calculating duration involves calculating the discounted...