Duration refers to the weighted average of the time to maturity of a debt security, where the weights are the present value of the cash flows received from investing in the debt security.

 Using duration

Duration can be used as a guideline for fixed income investment strategies. If interest rate is expected to increase, debt securities with short duration should be held, whereas, if interest rate is expected to decline, debt securities with long duration should be held. For instance, an investor who purchased a debt security with 3-month maturity received a return of 4.5 percent per year. When it reached maturity, he purchased a new debt security with 3-month maturity and received a return of 3.5 percent per year. This investor received average return of 4 percent per year. Another investor purchased a debt security with 6-month maturity as he expected that interest rate may decline within the next 3 months. This investor received a return of 4.25 percent per year. As a result, holding a debt security with longer maturity is better in this case.