What is the relationship between the duration of interest-bearing bonds and their maturity?

The concept of duration is critical in understanding the interest rate sensitivity of bonds. Duration measures the average time it takes for a bond’s cash flows to be repaid and can be affected by the bond's coupon rate, yield, and time to maturity.

For interest-bearing bonds, particularly those with regular coupon payments, the duration will typically be less than the bond's maturity. This is because the duration accounts not only for the time until the bond matures but also the timing of the cash flows (interest payments and principal repayment) that occur before maturity. Consequently, when a bond pays interest periodically, those earlier cash flows reduce the bond’s duration since they are returned to the investor sooner than the bond's final payment at maturity.

Longer-term bonds or those with lower coupon rates will tend to have longer durations than shorter-term bonds or those with higher coupon rates, but in both cases, the duration remains less than the bond’s maturity. This is crucial for investors, as it indicates that bonds with longer maturities are not always more sensitive to interest rate changes than those with shorter durations. Thus, understanding this relationship helps bond investors manage interest rate risk effectively.