When you buy a bond, there’s a chance the borrower might not be able to pay you back, but bonds also carry a different kind of risk.
Duration, or interest rate risk, is related to a bond’s sensitivity to changes in interest rates.
When interest rates go up, you won’t be able to sell a bond for the price you paid, says Will Gornall, an associate professor at UBC’s Sauder School of Business.
“Because they’re traded, if you have a three percent bond and now the going rate is four percent, no one’s going to pay full price for your three percent bonds,” he explained….