Difference Between Duration and Modified Duration

The Macaulay duration calculates the weighted average time before a bondholder would receive the bond's cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.

1. What does Modified duration tell you?
2. Is Modified duration measured in years?
3. Why Modified duration is a better measure than maturity?
4. What are the types of duration?
5. Is high modified duration good?
6. Can Modified duration be negative?
7. How Modified duration is calculated?
8. Which bond has the longest duration?
9. How is duration calculated?
10. What is the difference between duration and Macaulay duration?
11. What is the purpose of Macaulay duration?
12. What is effective duration?

What does Modified duration tell you?

Modified duration is a measure of a bond price sensitivity to changes in its yield to maturity. Macaulay's duration measures the weighted average time till the bond cash flows. ... Modified duration adjusts Macaulay's duration so that it can be used to estimate the price movement given a change in yield.

Is Modified duration measured in years?

The second type of duration is called "modified duration" and, unlike Macaulay duration, is not measured in years. Modified duration measures the expected change in a bond's price to a 1% change in interest rates.

Why Modified duration is a better measure than maturity?

Explain why modified duration is a better measure than maturity when calculating the bond's sensitivity to changes in interest rates. the bond price for a given change in yield to maturity. ... i) Modified duration increases as the coupon decreases.

What are the types of duration?

There are two types of duration: Macaulay duration and modified duration.

Is high modified duration good?

The modified duration provides a good measurement of a bond's sensitivity to changes in interest rates. The higher the Macaulay duration of a bond, the higher the resulting modified duration and volatility to interest rate changes.

Can Modified duration be negative?

1 Answer. The price-yield relationship is negatively correlated; when prices go down, the implied yield goes up. The minus sign allows the modified duration to be positive for a normal bond.

How Modified duration is calculated?

To find the modified duration, all an investor needs to do is take the Macaulay duration and divide it by 1 + (yield-to-maturity / number of coupon periods per year). In this example that calculation would be 2.753 / (1.05 / 1), or 2.62%.

Which bond has the longest duration?

Long bond is often a term used to refer to the longest maturity bond offering from the U.S. Treasury, the 30-year Treasury bond.

How is duration calculated?

The formula for the duration is a measure of a bond's sensitivity to changes in the interest rate, and it is calculated by dividing the sum product of discounted future cash inflow of the bond and a corresponding number of years by a sum of the discounted future cash inflow.

What is the difference between duration and Macaulay duration?

The Macaulay duration calculates the weighted average time before a bondholder would receive the bond's cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.

What is the purpose of Macaulay duration?

The bottomline

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What is effective duration?

Effective duration is a duration calculation for bonds that have embedded options. ... The impact on cash flows as interest rates change is measured by effective duration. Effective duration calculates the expected price decline of a bond when interest rates rise by 1%.