Duration and interest-rate risk
One number that says roughly how far a bond, or a debt fund, moves when yields change
Yields as on 1 September 2026; fund assets as on 31 August 2026
Verified 12 October 2026
For training and education only. Not investment advice.
Trainer notes
This deck follows 'Bond prices and yields'. Recap in one line: when yields rise, bond prices fall, and longer bonds fall more. Then ask: how much more? Duration is the answer the market uses.
Duration turns 'longer bonds move more' into a number.
It is measured in years. Read as a sensitivity, it says roughly how many per cent a bond's price moves when its yield changes by one percentage point.
Trainer notes
There are two closely related numbers, Macaulay duration and modified duration. The first is a length of time. The second is the sensitivity. We build one from the other in the next three slides.
Three terms to keep apart
Maturity
The time until the bond's last payment. It ignores every coupon paid before that date.
Macaulay duration
The average time the holder waits for the bond's money, each payment weighted by what it is worth today. Measured in years.
Modified duration
Macaulay duration ÷ (1 + yield). Roughly the percentage change in price for a one percentage point change in yield.
Take-away: Yield changes are quoted in basis points: 1 basis point is 0.01 percentage point.
Trainer notes
Maturity is a date, Macaulay duration is an average wait, modified duration is a sensitivity. A move from 7.00% to 7.25% is 25 basis points. The divisor (1 + yield) uses the yield per coupon period. With annual coupons, as in this deck, that is the annual yield. Government securities in India pay coupons every six months, so the market divides by (1 + half the yield). Do not go into this unless asked.
Macaulay duration: an average wait
The ₹1,000 bond with a 7% coupon from the last deck, with five years left, when the market yield is 7%.
| Year | Payment | Worth today at 7% | Year × worth today |
|---|---|---|---|
| 1 | ₹70 | ₹65.42 | 65.42 |
| 2 | ₹70 | ₹61.14 | 122.28 |
| 3 | ₹70 | ₹57.14 | 171.42 |
| 4 | ₹70 | ₹53.40 | 213.60 |
| 5 | ₹1,070 | ₹762.90 | 3,814.50 |
Worth today adds up to ₹1,000.00, the price. The last column adds up to 4,387.22. Macaulay duration = 4,387.22 ÷ 1,000 = 4.39 years. Illustration with assumed figures.
Trainer notes
'Worth today' is the payment divided by 1.07 once for each year of waiting: 70 ÷ 1.07 = 65.42, 70 ÷ 1.07² = 61.14 and so on. Most of the bond's value arrives in year 5, so the average wait is close to five years, but the four coupons pull it down to 4.39. The last column uses the rounded rupee figures; unrounded, the total is 4,387.21 and the answer is still 4.39.
Modified duration: the rule of thumb, tested
THE SET-UP
The same bond: ₹1,000 face value, 7% coupon, five years left, priced at ₹1,000.
Macaulay duration: 4.39 years.
Modified duration = 4.39 ÷ 1.07 = 4.10.
- The rule: change in price ≈ −modified duration × change in yield, with the change in yield in percentage points.
- Yield rises from 7% to 8%. Estimate: −4.10 × 1 = −4.10%, a price of ₹959.00. Full calculation: ₹960.07, a fall of 3.99%.
- Yield falls from 7% to 6%. Estimate: +4.10%, a price of ₹1,041.00. Full calculation: ₹1,042.12, a rise of 4.21%.
- Yield rises by half a point to 7.5%. Estimate: −2.05%. Full calculation: ₹979.77, a fall of 2.02%.
Result: Duration gives a close estimate, not the exact figure. The gap grows as the change in yield grows.
Illustration with assumed figures. Not a forecast.
Trainer notes
The full calculation discounts each payment at the new yield, as in the last deck. The estimate is a straight line; the true price curve bends. For a plain bond that bend works in the holder's favour: the fall is a little smaller and the rise a little larger than the estimate. The name for this is convexity; mention the word only if asked.
What makes duration longer
| No coupon | 7% coupon | 10% coupon | |
|---|---|---|---|
| 1 | 1 | 1 | 1 |
| 3 | 3 | 3 | 3 |
| 5 | 5 | 4 | 4 |
| 10 | 10 | 8 | 7 |
| 20 | 20 | 11 | 11 |
| 30 | 30 | 13 | 13 |
Read the chart
- Longer maturity, longer duration. With coupons, duration grows more slowly than maturity.
- A 30-year bond with a 7% coupon has a duration of 13.28 years.
- Lower coupon, longer duration. With no coupon, duration equals maturity.
- A higher market yield shortens duration a little.
Illustration: computed for annual-coupon bonds at a 7% market yield. Assumed figures. Points are not evenly spaced in time.
Trainer notes
Why a lower coupon means a longer duration: less of the bond's value arrives early, so the average wait is longer. For the five-year 7% bond, duration is 4.39 years at a 7% yield, 4.36 at 9% and 4.41 at 5%. These rules hold for plain fixed-coupon bonds; floating-rate bonds and bonds with call or put options behave differently.
SEBI sorts debt funds by Macaulay duration
Seven of SEBI's 17 debt fund categories are defined by the Macaulay duration of the whole portfolio.
| Fund category | Portfolio Macaulay duration | Illustration: approx. fall if yields rise 1 point |
|---|---|---|
| Ultra Short Term | 3 to 6 months | 0.25% to 0.5% |
| Ultra Short to Short Term | 6 to 12 months | 0.5% to 1% |
| Short Term | 1 to 3 years | 1% to 3% |
| Medium Term; Medium to Long Term | 3 to 4 years; 4 to 7 years | 3% to 4%; 4% to 7% |
| Long Term; 10-year Constant Maturity Gilt | Over 7 years; equal to 10 years | Over 6.5%; under 10% |
Source: SEBI Master Circular, 20 Mar 2026, para 3.8.2. Last column: our illustration, Macaulay duration x 1 (a little high), before interest earned.
Trainer notes
The last column is an illustration of sensitivity, not a forecast, and it ignores the interest the fund earns. Overnight, Liquid and Money Market funds are defined by maturity, not duration. Gilt, Corporate Bond, Dynamic Term, Credit Risk, Banking and PSU, Floating Interest Rate and Sectoral debt funds have no duration band. Medium Term and Medium to Long Term funds may go as low as one year in an anticipated adverse situation, with reasons recorded. The Potential Risk Class also uses Macaulay duration: Class I up to 1 year, Class II up to 3 years, Class III any.
What 'duration management' means
Within the limits of its category, the fund manager chooses how long the portfolio's duration should be.
The manager expects yields to fall
- Lengthens duration: buys longer bonds and sells shorter ones.
- If yields do fall, the longer portfolio gains more.
- If yields rise instead, it falls more.
The manager expects yields to rise
- Shortens duration: holds shorter bonds or more cash.
- If yields do rise, the shorter portfolio falls less.
- If yields fall instead, it gains less.
Take-away: It is a judgement about future rates, and it can be wrong. The category band limits how far it can go.
Source for the category limits: SEBI Master Circular for Mutual Funds, 20 March 2026, para 3.8.2.
Trainer notes
A Dynamic Term Fund may invest across duration, so the manager's call matters most there. A Short Term Fund must stay between one and three years whatever the manager expects. Duration also shortens by itself as bonds move towards maturity, unless the manager buys longer bonds. Do not suggest that any manager can reliably predict rates.
Where things stand
Yields on 1 September 2026 and fund assets on 31 August 2026. They change; check the date.
- INDIA 10-YEAR G-SEC YIELD
- 6.96%Yield on the 6.94% GS 2036, the 10-year benchmark government bond, on 1 September 2026.
- RBI POLICY REPO RATE
- 5.50%Raised from 5.25% on 7 Oct 2026 (5.25% on 1 Sep 2026).
- SHORT TERM FUND ASSETS
- ₹1.05 lakh cr₹1,05,045 crore on 31 August 2026. Long Term Funds held ₹11,435 crore.
Sources: RBI Current Rates (10-year yield, 1 Sep 2026); RBI Monetary Policy Statement, 7 Oct 2026; AMFI Monthly Note, August 2026 (category assets).
Trainer notes
Refresh these at each month-end, using market figures that are at least 30 days old. The asset figures show where debt fund money sits by duration category; they say nothing about which category is right for anyone. Do not comment on where yields will go next. Market figures are shown with a lag of at least 30 days, in line with SEBI's norms on price data used for education.
If you learnt this from older material
What older material says
- Names: Low Duration, Short Duration, Medium Duration, Long Duration, Dynamic Bond.
- 16 debt fund categories (SEBI, 6 Oct 2017).
- Price change = −modified duration × change in yield, as if exact.
- No label for a scheme's maximum rate risk.
What holds now
- Names: Ultra Short to Short Term, Short Term, Medium Term, Long Term, Dynamic Term.
- 17 debt fund categories (SEBI, 26 Feb 2026).
- That rule is an estimate, close only for small changes in yield.
- Potential Risk Class I, II or III (since 1 Dec 2021).
Take-away: The duration bands themselves did not change in 2026. The category names did.
Sources: SEBI circular on categorisation of schemes, 6 Oct 2017; SEBI Master Circular for Mutual Funds, 20 Mar 2026, paras 3.8.2, 3.8.9 and 6.18.
Trainer notes
Existing schemes had until 26 August 2026 to move to the new names. Clients and older factsheets will still say 'low duration fund' or 'dynamic bond fund'; map the old name to the new one rather than correcting the client. 'Ultra Short Duration' became 'Ultra Short Term' and 'Medium to Long Duration' became 'Medium to Long Term'. The 1 December 2021 date for the Potential Risk Class comes from a secondary report of SEBI's circular of 7 June 2021.
Four things people get wrong
Misconception'Duration is the same as maturity.'
What is trueOnly for a bond that pays no coupons. With coupons, duration is shorter than maturity, because some money arrives early.
Misconception'A 4-year duration is a lock-in.'
What is trueDuration is a sensitivity, not a holding period. It says how far the price moves, not how long you must stay.
Misconception'Short duration means no risk.'
What is trueIt means less interest-rate risk. Credit risk and liquidity risk are separate, and returns are still not assured.
Misconception'A fund's duration is fixed.'
What is trueIt changes as bonds age and as the manager buys and sells. Look at the latest portfolio disclosure and the category band.
Trainer notes
On the second point: some schemes charge an exit load for early redemption, which is a separate matter from duration. On the third: the previous deck in this series covers credit risk.
Check yourself
Question 1: A bond has a modified duration of 6. Its yield rises by 0.50 percentage point. Roughly how much does its price change?
Answer: It falls by roughly 3%. −6 × 0.50 = −3.0%. This is an estimate; the full calculation gives a slightly smaller fall.Question 2: Two bonds mature in 10 years. One pays an 8% coupon every year. The other pays no coupon until maturity. Which has the longer duration, and why?
Answer: The one with no coupon. All its money arrives at the end, so its Macaulay duration is the full 10 years. The 8% bond pays part of its value earlier, so its average wait is shorter (about 7.35 years at a 7% yield).Question 3: Yields rose last month. A client's Long Term Fund fell much more than a friend's Short Term Fund. What is the explanation?
Answer: A Long Term Fund must keep a portfolio Macaulay duration above 7 years; a Short Term Fund keeps it between 1 and 3 years. The longer the duration, the larger the fall in bond prices for the same rise in yields. That is the interest-rate effect; a default would be a separate matter.
Sources and disclaimer
Sources for the figures in this explainer
- Debt fund categories and duration bands (para 3.8.2), compliance date (para 3.8.9), Potential Risk Class (para 6.18): SEBI Master Circular for Mutual Funds, 20 March 2026.
- Earlier category names and the count of 16: SEBI circular 'Categorization and Rationalization of Mutual Fund Schemes', 6 October 2017.
- 10-year government bond yield (6.94% GS 2036, 6.9570% on 1 Sep 2026): Reserve Bank of India, Current Rates (page archived 2 Sep 2026).
- Policy repo rate 5.50% from 7 Oct 2026: RBI Monetary Policy Statement, 7 October 2026.
- Short Term and Long Term Fund assets on 31 August 2026: AMFI Monthly Note, August 2026.
- All duration figures, bond prices and the chart are illustrations computed with assumed figures. They are not quotes for any actual bond or scheme.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).