Dollar Duration

What Is Dollar Duration?

Dollar duration expresses interest rate risk in money rather than percentages. It takes a bond's modified duration and multiplies it by the bond's current market price. The result shows roughly how many dollars the bond's value will gain or lose when yields move. Because it is stated in currency, it makes the rate sensitivity of holdings of different sizes easier to compare, and it can be added up across a whole portfolio.

How It Is Calculated

The basic formula is:

Dollar Duration = Modified Duration × Price

Analysts usually quote the figure for a standard yield move, most often one percentage point, or one basis point (a hundredth of a percentage point), in which case the result is scaled down accordingly. To estimate the price change, multiply the dollar duration by the change in yield expressed as a decimal. For example, a bond with a modified duration of 5 and a price of $1,000 has a dollar duration of $5,000. If yields rise by one percentage point (0.01), the estimated price falls by about $50. If yields fall by the same amount, the price would be expected to rise by about $50.

Why It Matters to Investors

Dollar duration makes rate sensitivity concrete. A percentage figure alone does not show how much money is at stake, and two bonds with the same duration can carry very different dollar risk if their prices differ. Investors who hold several bonds, or who oversee funds, often add up dollar durations across positions to see their combined exposure to changes in bond yield levels. Traders frequently use a closely related measure, DV01, which gives the dollar change for a one-basis-point move.

Limitations

The estimate is linear, so it works best for small yield changes. For larger moves, the actual price change differs because the relationship between price and yield is curved. That curvature is captured by convexity. Dollar duration also assumes that the bond's cash flows are otherwise unchanged, and it does not account for credit risk, call features, or other factors that can move a bond's price independently of interest rates.