gen-briefly-explain-duration-and-interest-rate-risk-and-one-comm-dda6

Briefly explain duration and interest-rate risk and one common misconception about it.

# Duration and Interest-Rate Risk **Duration** is a measure of a bond's price sensitivity to interest rate changes. It estimates how much a bond's price will change for each 1% move in interest rates. **Interest-rate risk** is the risk that rising interest rates will cause bond prices to fall (and vice versa). When rates go up, existing bonds with lower rates become less valuable. ## Common Misconception **"If I hold a bond to maturity, I have no interest-rate risk."** While it's true you'll receive the full face value at maturity (barring default), this overlooks **reinvestment risk**. If you receive coupon payments during a period of falling rates, you'll have to reinvest that income at lower yields, reducing your total return. Additionally, you face **opportunity cost**—your money is locked into a lower-yielding bond when better opportunities may exist elsewhere. You also lose **liquidity flexibility**; if you need to sell before maturity during a rising rate environment, you'll still face losses.