Before investing in a duration fund, one can make a fair estimate of gains by looking at the modified duration
and yield-to-maturity (YTM).
It combines EDI's fixed income and pricing data with algorithm apps from The Beast Apps, a provider of a cloud based Financial App Store offering access to data, analytics, risk and valuation services, to generate an initial set of 11 fixed income derived data fields such as Yield to Maturity, Modified Duration
, Effective Duration and Convexity.
The modified duration
of UCO's AFS investment portfolio is relatively high at around four times as on Dec-10 and will impact its profitability in a rising interest rate scenario.
We employ both effective duration and modified duration
as the measures of interest rate sensitivity in this study.
approximates the percentage change in the price of a bond for a given change in interest rates, and is calculated as follows:
Distinctions are usually made clearly, except that most of the references to duration in the book are, in fact, references to modified duration
In practical terms, modified duration
is used as a measure of the price sensitivity of an instrument, given a change in interest rates.
gauges interest sensitivity by making equal interest rate shifts at all maturities of the current term structure and revaluing a portfolio under the new (parallel) term structure.
Specifically, modified duration
can be viewed as an elasticity that estimates the percentage change in the value of an instrument for each percentage point change in market interest rates.
5 Modified duration
is the change in the price of a security, expressed in years, expected in response to each 1% change in the yield to maturity of the portfolio's holdings.
According to Pandya, investors with a six-month horizon should invest in products that have a modified duration
of up to six months, for instance, ultra short-term funds.
ICRA has also taken note of the relatively higher modified duration
of the investment book of the bank which makes it more vulnerable in terms of mark-to-market (MTM) risks in a rising interest rate scenario.