Modified duration
The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is inversely related to the approximate percentage change in price for a given change in yield.
Modified Duration
A formula that attempts to explain a change in the price of a bond as a function of a change in interest rates. It is based on the assumption that rises in interest rates depress bond prices and drops in rates do the opposite. It is calculated as:
Modified Duration = Macauley Duration / (1 + YTM/Number of coupon payments per year)
Modified Duration = Macauley Duration / (1 + YTM/Number of coupon payments per year)
Modified Duration
What Does Modified Duration Mean?
A formula that expresses the measurable change in the value of a security in response to a change in interest rates. It is calculated as follows:
Where n = number of coupon periods per year, YTM = the bond's yield to maturity.
Investopedia explains Modified Duration
Modified duration adheres to the principle that interest rates and bond prices move in opposite directions. This formula is used to determine the effect that a 100-basis-point (1%) change in interest rates will have on the price of a bond.
Related Terms:
• Basis Point
• Bond
• Coupon
• Duration
• Interest Rates
How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content.
| ?Page tools | ||
|---|---|---|
|