# Dollar Duration Explained: Definition, Formula & Limitations

![Dollar Duration: A measure of the dollar change in a bond's value to a change in the market interest rate.](https://www.investopedia.com/thmb/_jCFh7N4Zr4dU6Pe8jfOJzhEKlw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dollar-duration.asp-final-e6064fed294748be9b2464576415714a.png)

*— Investopedia / Julie Bang*

## What is the Dollar Duration

Dollar [duration](https://www.investopedia.com/terms/d/duration.asp), known as DV01, helps assess how a bond's monetary value changes with a 100 basis point interest rate shift. This metric assists [bond fund](https://www.investopedia.com/terms/b/bondfund.asp) managers in evaluating a portfolio’s [interest rate risk](https://www.investopedia.com/terms/i/interestraterisk.asp), offering practical insights into changes as a dollar amount. Understand this linear approximation’s application and its limitations due to interest rates’ non-linear relationship with bond pricing.

### Key Takeaways

*   Dollar duration, or DV01, measures the dollar change in a bond's value for every 100 basis point change in interest rates.
*   It is a useful tool for bond fund managers to approximate a portfolio's interest rate risk in dollar terms.
*   The calculation assumes a linear relationship between a bond's value and interest rate changes, which can lead to approximation errors.
*   Dollar duration is applicable to a variety of fixed-income products but assumes bonds have fixed interest rates and interval payments.
*   Compared to other duration methods, dollar duration provides a straightforward dollar amount for a 1% change in rates.

## Understanding Dollar Duration in Bond Investments

Dollar duration, also known as money duration or DV01, uses a linear model to estimate a bond's value change with interest rate shifts. The bond's value doesn't change linearly with interest rates, so dollar duration is imprecise, accurate only for small rate changes.

Dollar duration calculates how much a bond's value changes with a 100-basis point interest rate shift. Dollar duration is formally known as DV01, which stands for dollar value per 01. Note that 0.01 equals 1 percent, commonly denoted as 100 [basis points (bps)](https://www.investopedia.com/ask/answers/what-basis-point-bps/). To calculate the dollar duration of a bond you need to know its duration, the current interest rate, and the change in interest rates.

>              Dollar Duration = DUR x (∆i/1+ i) x P

where:

*   DUR = the bond's straight duration
*   ∆i = change in interest rates
*   i = current interest rate; and
*   P = bond price

While dollar duration refers to an individual bond price, the sum of the weighted bond dollar durations in a portfolio is the portfolio dollar duration. Dollar duration can be applied to other fixed income products as well that have prices that vary with interest rate moves.

## Comparing Dollar Duration with Other Duration Methods

Unlike [Macaulay](https://www.investopedia.com/terms/m/macaulayduration.asp) and [modified durations](https://www.investopedia.com/terms/m/modifiedduration.asp), dollar duration gives a dollar-based rate change measure. Modified duration measures price sensitivity and volatility, while Macaulay duration assesses bond sensitivity using the coupon rate and yield to maturity.

## Limitations and Considerations for Using Dollar Duration

Dollar duration has limitations. First, it assumes a parallel-moving, negative-slope yield curve, making it an approximation. For large portfolios, this becomes less restrictive.

Another limitation is its assumption that bonds have fixed rates and intervals. However, bond interest rates vary with market conditions and synthetic instruments.

## The Bottom Line

Dollar duration, also known as DV01, is a crucial tool for bond fund managers to assess interest rate risk by quantifying changes in a bond's value due to movements in interest rates. It provides a straightforward dollar-value change for a 100 basis point interest rate adjustment, helping in managing portfolios with fixed income products. However, the measure is an approximation, as it assumes a linear relationship between bond value and interest rates, and it is most accurate for small rate changes. Understanding these limitations is essential for effectively incorporating dollar duration into financial analysis and portfolio management strategies.