read somewhere that a 10-year bond doesn’t actually have 10-year risk. something about duration being different from maturity. genuinely confused. can someone explain this in plain terms?
Duration and maturity are different things and the distinction matters more than most people realise. Maturity is simply when the bond repays your principal. Duration is a measure of how sensitive the bond’s price is to interest rate changes, and it accounts for all the cash flows along the way, not just the final one. A bond that pays you coupons every six months is returning a portion of your investment throughout its life. Each of those coupon payments reduces the effective time you are exposed to interest rate risk. So a 10-year bond with a high coupon might have a duration of only 6 or 7 years, meaning it behaves more like a 6 or 7-year bond in terms of price sensitivity.
okay so a bond that pays more coupons is actually less risky than one that pays fewer? even if they both mature in 10 years?
Yes, and it is one of those things that sounds counterintuitive until you think about it from first principles. If a bond pays you a large coupon every six months you are getting your money back faster. You are not waiting 10 years to see a rupee. Each payment reduces your exposure. A zero coupon bond, which pays nothing until maturity, has duration exactly equal to maturity because every single rupee is at risk for the full 10 years. That is the extreme case that makes the concept click.
the zero coupon example actually helps. so zero coupon = maximum duration = maximum interest rate risk for a given maturity
okay this is clicking now
high coupon bond = gets money back faster = lower duration = less rate risk
zero coupon bond = gets nothing till end = duration equals maturity = maximum rate risk
same 10 year maturity, completely different behaviour
so when I see a bond listed on BondScanner, should I be looking at something other than just the maturity date and yield?
Duration is the number you want if you care about interest rate sensitivity. Most retail platforms do not display it prominently but it is worth understanding even conceptually. A rough rule: higher coupon bonds have lower duration relative to their maturity. If you are buying a 9.5% coupon bond maturing in 10 years, it is behaving more like a 6 to 7 year instrument in terms of price risk. If rates rise after you buy, the mark-to-market hit is meaningfully smaller than you might expect from the maturity date alone.
wait so buying a high coupon bond is actually a form of protection against rising rates? because the duration is shorter?
That is exactly right. In a rising rate environment, high coupon bonds hold their value better than low coupon bonds of the same maturity. The flip side is that in a falling rate environment, low coupon or zero coupon bonds appreciate more because their duration is longer and they benefit more from each basis point of rate decline. Duration is a double-edged thing. Long duration is good when rates fall and painful when rates rise.
tldr: maturity = when you get principal back
duration = actual interest rate risk, not the same thing
high coupon shortens effective duration
check duration not just maturity if rates are likely to move