This measures the sensitivity of the dollar price of a derivative to the dollar price of its underlying asset. Government bonds also have their own measure of risk, known as duration . Duration measures the sensitivity of the bond price to changes in the general level of interest rates. First, we will define duration and later show that it has this property.
Duration is a measure of the average time to receipt of cash from a bond.
Indeed, as we shall see, it does exactly this. Now consider the more complex case of a coupon bond, such as the one illustrated in the attached picture. Clearly, the average time to receipt of cash should be between 1 and 4. In addition, we would hope that more weight would be placed on dates when cash flows are relatively large. Since most of the cash is received at the end of year 4, we would expect the average time to receipt of cash to be closer to 4 than to 1.