Duration measures which aspect of a bond?

• A. Time until maturity
• B. The bond's yield to maturity
• C. The bond's credit risk
• D. The bond's sensitivity to interest rate changes

Answer: (D)

Duration focuses on how bond prices respond to changes in interest rates. It tells you roughly how much the price will move when yields move, by combining when cash flows are received and how large they are. The practical link is that small changes in yield lead to price changes roughly equal to the negative of duration times the change in yield: price change ≈ - (duration) × Δyield. This makes duration a measure of interest-rate risk, not a measure of time until maturity or the bond’s yield to maturity, and not a direct measure of credit risk. Longer duration means greater sensitivity to rate changes, while higher coupons shorten duration because more cash comes in sooner. A zero-coupon bond, paying no intermediate coupons, has a duration close to its maturity.