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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:
Where:
n = number of coupon periods per year
YTM = the bond's yield to maturity
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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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Bonds with higher duration carry more risk, making this measure an important one for investors to calculate.
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