Bond duration and interest rate risk share a direct, positive, and proportional relationship: higher duration indicates higher interest rate risk. Duration measures a bond's price sensitivity to interest rate changes. For example, a bond with a 5-year duration will lose roughly 5% of its value if interest rates rise by 1%, and gain 5% if they fall by 1%.
Generally, when interest rates rise, the higher a bond's duration is, the more its price will fall. Time to maturity and a bond's coupon rate are two factors that affect a bond's duration. A fixed-income portfolio's duration is computed as the weighted average of individual bond durations held in the portfolio.
That's not to be confused with a bond's maturity, which is simply the date on which a bond issuer must repay the principal of a bond to the bond holder in full. Generally, the higher the duration, the more sensitive your bond investment will be to changes in interest rates.
Bonds have an inverse relationship to interest rates. When interest rates rise, bond prices usually fall, and vice versa.
Duration assumes a linear relationship between bond prices and changes in interest rates. In actuality, however, prices fall at an increasing rate as interest rates rise; similarly, prices rise at an increasing rate as interest rates fall.
A higher duration implies greater price volatility should rates move. Duration is quoted as the percentage change in price for each given percent change in interest rates. For example, the price of a bond with a duration of 2 would be expected to increase (decline) by about 2.00% for each 1.00% move down (up) in rates.
Warren Buffett views bonds as a safe haven for cash, often recommending a 90/10 portfolio (90% S&P 500 index fund, 10% short-term government bonds) for average investors, while Berkshire Hathaway itself holds large amounts of U.S. Treasury bills for capital preservation and to earn competitive yields, especially when stocks are expensive. He favors short-term Treasuries (T-bills) due to low interest rate risk and high liquidity, using them to park cash while waiting for better stock opportunities, rather than as a primary growth engine.
Therefore, when interest rates rise or are expected to, they tend to be less affected than investment grade bonds. However, when interest rates fall or are expected to, the prices of high yield bonds are likely to rise by less than prices of investment grade bonds.
Investors holding a high duration bond need to wait longer for the bond's value to be repaid. But over a longer timeline, it is more likely that interest rates will rise, which means there is a higher likelihood that the bond's value will decline.
A fundamental principle of bond investing is that when interest rates rise, bond prices typically decrease. This leaves investors exposed to interest rate risk—the risk that an investment's value will fluctuate due to changes in interest rates.
How investors use duration. Generally, the higher a bond's duration, the more its value will fall as interest rates rise, because when rates go up, bond values fall and vice versa.
Put a little extra in every month
The first and most obvious way to reduce your loan term is to put in extra money every month. You'd be surprised at what a big difference just a couple of hundred rand a month can make. For example, on a R1 000 000 bond at a 10.25% interest rate, monthly repayments are R9 816.
Long-term bonds are more sensitive to interest rate changes than short-term bonds because their fixed payments extend over many years, making their prices fluctuate more when rates move. This sensitivity is measured by duration, which indicates how much a bond's price will change for a given shift in interest rates.
If the new bonds have higher interest rates, the investors who buy them will make more money than you. On the other hand, your Treasury bonds will become more valuable if the newer interest rates are lower than yours. Orman explained that these rate changes affect bonds differently depending on their maturity.
Warren Buffett's 8+8+8 Rule is a concept for a balanced life, suggesting dividing your day into three equal 8-hour segments: 8 hours for work, 8 hours for sleep, and 8 hours for yourself (personal growth, family, health). While it emphasizes smart work and rest for productivity, critics note real-life factors like commuting and chores can make perfect balance challenging, but the core idea promotes intentional time management for well-being and success.
The protection offered by global bonds during periods of equity market downturns is nothing new. The long-term return correlation between equities and bonds has been broadly negative since the 1990s, meaning the asset classes generally move in opposite directions.
The 7-3-2 rule is a financial strategy for wealth building, suggesting it takes 7 years to save your first major financial goal (like a crore), then accelerating to achieve the next goal in 3 years, and the third goal in just 2 years, leveraging compounding and disciplined, increased investments (like a 10% annual SIP hike). It highlights how returns compound faster over time, drastically reducing the time needed for subsequent wealth targets, emphasizing patience and consistent, growing contributions.
There are three types of bond durations namely, Macaulay duration, modified duration and effective duration. A Macaulay duration represents the weighted average time before a bond's cash flows are fully paid and provides an effective way of measuring the time until an investor will get their money back.