Effective duration is the most comprehensive measure of duration, which can be used for a bond with or without the embedded options as it doesn’t assume the cash flows to remain constant over the life of the security. The inputs that go into the calculation address the issue of interest r...
Effective duration approximates modified duration. But there is a difference in the denominator for calculation of both. The modified duration can be called a yield duration, while effective duration is a curve duration. This is so because the former is calculated using its own YTM, and the lat...
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Thank you for reading CFI’s guide on Modified Duration. To keep advancing your career, the additional resources below will be useful: Bond Pricing Effective Duration DURATION Function in Excel Equity vs Fixed Income See all fixed income resources...
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Owing to the magnifying effect of time value of money, it can be established that interest rate risk is higher for debt securities with longer term, lower coupon rates and lower yield to maturity. TypesMacaulay duration, modified duration, effective duration and key rate duration are the main ...
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Effective duration = (P(1) - P(2)) / (2 x P(0) x Y) Example of Effective Duration As an example, assume that an investor purchases a bond for 100% par and that the bond is currently yielding 6%. Using a 10 basis-point change in yield (0.1%), it is calculated that with a ...
The key rate duration calculates the change in a bond's price in relation to a 100-basis-point (1%) change in the yield for a given maturity. When a yield curve has a parallel shift, you can use effective duration, but key rate duration must be used when the yield curve moves in a...
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