What does duration indicate in bond pricing?

Duration is a crucial concept in bond pricing as it measures a bond's sensitivity to changes in interest rates. Specifically, duration quantifies the weighted average time until a bond's cash flows are received. A bond with a higher duration will experience a greater price change in response to interest rate fluctuations compared to a bond with a lower duration. This relationship stems from the fact that when interest rates rise, bond prices typically fall, and the magnitude of that price movement is influenced by the bond's duration. Therefore, understanding duration helps investors assess the interest rate risk associated with a bond.

The other options, while related to bonds, do not accurately describe the aspect of duration. Nominal interest rates denote the fixed interest income the bond pays, face value refers to the amount paid back to the bondholder at maturity, and repayment schedules detail when principal and interest payments occur. None of these factors encapsulate the concept of duration, which specifically addresses sensitivity to interest rate changes.