Modified Duration

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Definition: Modified Duration

Modified duration tells that how sensitive the bond price is in relation to the change in interest rates.

The formula for calculating modified duration is = D/ [1 + (YTM/n)]

where D is the time period/ duration, YTM is the yield to maturity and number of coupon periods in a year.

It helps in determining the effect that a 1% change or 100 basis point change in interest rate will have on the market price of the bond.


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