Modified Duration

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DEFINITION of 'Modified Duration'

A formula that expresses the measurable change in the value of a security in response to a change in interest rates. Calculated as:

Modified Duration



Where:
n = number of coupon periods per year
YTM = the bond's yield to maturity

INVESTOPEDIA EXPLAINS 'Modified Duration'

Modified duration follows the concept 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.

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    The modified duration is an adjusted version of the Macaulay duration and takes into account how interest rate fluctuations ... Read Full Answer >>
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    Macaulay duration and modified duration are used in fixed income markets to determine a bond's duration. The Macaulay duration ... Read Full Answer >>
  3. What is the risk return tradeoff for bonds?

    Macaulay duration and modified duration are mainly used to calculate the durations of bonds. The Macaulay duration calculates ... Read Full Answer >>
  4. What is the relationship between modified duration and interest rates?

    Modified duration is a formula that measures the value of a bond in relation to changes in interest rates. Modified duration ... Read Full Answer >>
  5. Which securities are considered investment grade?

    In finance, government and private fixed income securities, such as bonds and notes, are considered investment grade if they ... Read Full Answer >>
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