When referring to bonds, the terms "maturity" and "duration" are often used interchangeably. However, this is incorrect. Although the terms are related, they refer to different things. A bond's maturity is the length of time from when the bond was issued to when it expires. The duration is the length of time between payments made to the bond holder.
When a bond matures, all payments have been made on the bond and it is no longer worth anything. The length of a bond's maturity can vary, from several months to several decades. In all cases, the maturity is scheduled in advance, when the bond is issued.
The duration of a bond is the length of time between payments made by the issuer of the bond. For example, if payments are made to the bond holders every month, then the bond would have a duration of a month. In some cases, the bond will be structured so that the durations between payments are different.
Often, an investor will speak of a bond's average duration. For example, some bonds provide payments every month for the first half of their life and then provide payments only every other month. These bonds could be said to have an average duration of 1.5 months. In addition, an investor can also weight the duration of each cash flow. This is known as a Macauley duration.
The only time that a duration and a maturity of a bond will be equal is when the bond is structured so that the bond issuer pays back the bond all at once at the end of its life. In such an instance, the length of time until the bond's maturity and the length of duration between payments can be said to be equal, as they occur after the same length of time from the bond's issuance.
- "Investing For Dummies"; Eric Tyson; 2008
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