Bond prices move inversely to interest rates, and duration—expressed in years—measures how sharply a bond's value shifts for each percentage-point change in rates. FINRA's rule of thumb holds that a bond with a duration of 10 is expected to fall roughly 10% if rates rise by 1 percentage point. MSRB confirms that longer-maturity bonds carry greater rate sensitivity, a dynamic the Federal Reserve's own balance-sheet accounting reflects as well.
Why Do Bond Prices Fall When Interest Rates Rise?
Bond prices and interest rates move in opposite directionsCITE:E1. The U.S. Municipal Securities Rulemaking Board (MSRB) states that interest rates and bond prices have an inverse relationship, so when market interest rates rise, bond prices fall, and vice versaCITE:E1. This is not only a retail-investor phenomenon: the Federal Reserve's own accounting shows the same mechanism at work on a balance-sheet scale. The Federal Reserve notes that when interest rates rise, the market value of securities it holds declines, resulting in a decrease in the unrealized position; when interest rates fall, the unrealized position increasesCITE:E7. The direction of the relationship is identical whether the holder is an individual bondholder or a central bank.
How Is Bond Duration Defined, and in What Unit Is It Expressed?
The Financial Industry Regulatory Authority (FINRA) defines duration as a measure of how much a bond's value is likely to change if rates moveCITE:E2. Specifically, FINRA states that bond duration is a measure of the degree to which a bond investment is likely to change in value if interest rates were to rise or fallCITE:E2. FINRA further specifies that this measure is stated in years: duration signals how much the price of a bond investment is likely to fluctuate when there is an up or down movement in interest ratesCITE:E3. In other words, duration converts an abstract sensitivity into a single, year-denominated number attached to each bond.
How Is Duration Used to Quantify the Price Impact of a Rate Change?
FINRA's rule of thumb ties a 1-percentage-point rate move directly to a bond's duration numberCITE:E4. Generally speaking, FINRA explains, for every 1 percentage-point change in interest rates, a bond will rise or fall in the opposite direction by an amount equal to its duration numberCITE:E4. FINRA illustrates this with a worked example: if a bond has a duration of 10 and interest rates increase by 1 percentage point, that bond's price would be expected to decline by approximately 10 percentCITE:E5.
| Duration (years) | Rate Change | Expected Price Change |
|---|
| 10 | +1 percentage point | approximately -10% |
This table reflects FINRA's stated example only; the underlying rule of thumb applies proportionally to any duration and any rate move of that magnitudeCITE:E4.
Why Are Longer-Maturity Bonds More Sensitive to Interest Rate Changes?
MSRB states that time to maturity and rate sensitivity move togetherCITE:E6. The longer the time to maturity of a bond, the more sensitive that bond will be to changes in interest rates, according to MSRBCITE:E6. Combined with FINRA's duration rule, this means bonds further from maturity tend to carry higher duration numbers, and therefore larger expected price swings for the same 1-percentage-point rate moveCITE:E4.
What This Means
Across these sources, a single mechanism repeats at different levels of detail. MSRB establishes the direction: rates up, prices downCITE:E1. The Federal Reserve's balance-sheet notes confirm the same direction applies to unrealized positions on large institutional holdingsCITE:E7. FINRA supplies the magnitude: duration, stated in years, converts that directional relationship into a specific number, and its rule of thumb — a 1-percentage-point rate move producing a price move roughly equal to the duration number — turns a duration of 10 into an expected ~10% swingCITE:E4CITE:E5. MSRB's maturity observation closes the loop by explaining why some bonds carry higher duration numbers than others: longer time to maturity raises sensitivityCITE:E6.