Duration differs from maturity because it accounts for all intermediate payments. The more money an investor receives earlier, the shorter the duration: a bond with a high coupon has shorter duration than a bond with the same maturity but lower coupon. For a discount bond without coupons, duration equals the time to maturity.
Practical application — assessing interest rate risk. Duration approximately shows the percentage change in a bond's price when yield changes by one percentage point. A bond with three-year duration will depreciate about 3% when rates rise by 100 basis points; with seven-year duration, the decline will be around 7%.
This leads to portfolio management rules. Expecting rising rates, an investor reduces duration by shifting to shorter maturities to minimize losses. Expecting declining rates — increases duration to gain larger price appreciation.
For an investor planning to hold a bond until maturity, duration has limited significance: interim price changes don't affect final results if the issuer meets obligations. The metric matters primarily for those considering early sale.