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Modified Duration

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 30 Apr 2023

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Modified Duration

Modified duration is a measure of a bond’s sensitivity to changes in interest rates. It is a measure of the percentage change in the price of a bond for a given change in the yield. It is calculated by dividing the Macaulay duration of a bond by one plus the yield to maturity of the bond. Modified duration is used to measure the price volatility of a bond in response to changes in interest rates. It is an important tool for investors to understand the risk associated with their investments.

History of Modified Duration

Modified duration was first introduced by Frederick Macaulay in 1938. Macaulay was a professor of economics at Columbia University and is considered one of the most influential economists of the 20th century. He developed the concept of modified duration as a way to measure the sensitivity of a bond’s price to changes in interest rates. Modified duration is an important tool for investors to understand the risk associated with their investments.

Comparison of Modified Duration

Bond Yield to Maturity Macaulay Duration Modified Duration
Bond A 3.5% 5.2 years 4.9 years
Bond B 4.5% 5.8 years 5.3 years

Summary

Modified duration is a measure of a bond’s sensitivity to changes in interest rates. It is calculated by dividing the Macaulay duration of a bond by one plus the yield to maturity of the bond. Modified duration is an important tool for investors to understand the risk associated with their investments. For more information about modified duration, investors can visit websites such as Investopedia, The Balance, and Bloomberg.

See Also

  • Macaulay Duration
  • Yield to Maturity
  • Interest Rate Risk
  • Duration Gap
  • Convexity
  • Bond Price Volatility
  • Interest Rate Sensitivity
  • Duration Hedging
  • Duration Matching
  • Duration Arbitrage

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