In the fund profiles above, we discuss average effective duration and average maturity. These core measures help investors understand the risks involved with a given fixed-income investment, specifically interest rate risks.
What Is Effective Duration?
Effective duration is a measure of the sensitivity of a bond or bond portfolio’s price to changes in interest rates. It takes into account not only the time to maturity but also the impact of cash flows like coupon payments.
In other words, effective duration considers how the bond’s price would change for every 1% change in interest rates, taking into account both the bond’s periodic interest payments and the final principal payment at maturity.
Like average maturity, effective duration is expressed as a number of years. Bonds with higher effective duration are more sensitive to interest rate changes and are likely to experience larger price fluctuations…
