Duration is a measure of a bond's sensitivity to interest rates. Effective duration is the expected decline in a bond's price in response to an increase in its yield – or more specifically, it measures how many percentage points the price of the bond will decline if the yield advances by 1 percent. The reason this is related to interest rates is that if you buy a bond with a maturity of 5 years, a coupon of 4% and you bought it at par (i.e. 100%) for $1,000, your expected annual interest is $40 ($1,000 x 4%). If interest rates rise before the bond has expired – let's say to 7% – then it means new bonds are now being issued with a 7% coupon. This means your bond with a 4% coupon is no longer worth as much as it was – you could invest that same $1,000 in a higher-yielding bond. The opposite is true when interest rates rise.