From ‘Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yield, and Stock Prices in the United States Since 1856’

The difficulties connected with the problem of arriving at a completely satisfactory concept of 'duration' are, indeed, extremely great. Any proposed solution almost necessarily involves some paradoxes. The difference in 'duration' of the two bonds is manifest in their prices. As the payments are made earlier on the 6 per cent bond, its price is necessarily higher. The concept of 'duration' throws a flood of light on the fluctuations of bond yields in the actual market. It is clear that 'number of years to maturity' is a most inadequate measure of 'duration'. Sometimes, as in the case of a low coupon, short term bond, it may be overwhelmingly the most important factor. Whether one bond represents an essentially shorter or an essentially longer term loan than another bond depends not only upon the respective 'maturities' of the two bonds but also upon their respective 'coupon rates'—and, under certain circumstances, on their respective 'yields'.