Modified duration - Financial definition
Financial acronyms
The entire acronym collection of this site is now also available offline with this new app for iPhone and iPad.
Concise definition of the term modified duration
Modified duration is measuring the approximate percentage change of a bond's price if its yield changes by 100 basis points.
Comprehensive definition of the term modified duration
A modified duration of 4.5 means that the bond price will change by 0.045 % for a one basis point change in yield. It can therefore be used to predict the actual change in the price of a bond for a given change in interest rates: PVBP = modified duration x bond price x 0.01%.
The higher a bond's duration, the stronger the bond's price will react to yield changes, thus the more exposed to interest risk it is. It should also be noted that, the higher the variation of the yield, the lower the precision of the modified duration as an estimation for price change will be. This is due to the convexity of the price-yield relationship. For that reason, modified duration is generally used in combination with a convexity adjustment.
Note: If market participants talk about 'duration' they will generally be referring to the modified duration rather than the Macauley duration, from which it is derived.