Modified Duration

Triston Martin Updated on Aug 13, 2022

Because the bond market is more complicated than the stock market, the investor must be aware of the modified length of the bond. Before the investor can determine the bond's modified duration, there is one more element that has to be figured out, and that is the bond's Macauley duration. The investor has to identify the time of the cash flows before they can compute the Macaulay Duration. The following are some durational principles that should be kept in mind. To begin, the length of the bond becomes longer as maturity does, which makes the bond more volatile.

A formula known as modified duration may be used to quantify the amount by which the value of a security can be expected to vary in response to a change in interest rates. The foundation of the modified duration strategy is that changes in interest rates and bond prices move in opposing directions. The purpose of this formula is to calculate how the price of a bond will change in response to a change in interest rates of one percentage point (100 basis points). The modified duration is an extension of the Macaulay duration, enabling investors to assess a bond's sensitivity to changes in interest rates. Modified duration indicates how sensitive a bond is to fluctuations in interest rates. The Macaulay duration is a method for determining the weighted average amount of time that must pass before a bondholder is entitled to receive the bond's cash flows. Before attempting to compute the modified duration, it is necessary to calculate the Macaulay duration.

What Modified Duration Can Tell You

This is because bonds with longer durations experience greater price volatility than bonds with shorter durations, assuming that all other risk factors remain constant. There are many different kinds of duration, and the formula for calculating duration takes into account all aspects of a bond, including its price, coupon, maturity date, and interest rates. The following are some durational principles that should be kept in mind. To begin, the length of the bond becomes longer as maturity does, which makes the bond more volatile. Second, the rise in a bond's coupon rate results in a shorter period for the bond, which in turn makes the bond less volatile. Third, when interest rates rise, duration falls, and the bond's vulnerability to further interest rate hikes diminishes, we may say that the bond is becoming less risky.


Macaulay Duration= The weighted average is calculated based on the duration.

Duration before starting to receive cash flows from the bond. As a result, the calculation of the adjusted duration comes first in the sequence. The next step for the investor is to determine the bond's Macaulay duration using the appropriate formula. Yield to maturity, abbreviated YTM, refers to the total return an investor in a bond would get if the bond were kept until it matured and is calculated as the annual percentage yield. N equals the total number of coupon periods in a given year.


  • The most significant benefit is that the investor must be aware of the length of the bond; this is because the price volatility of bonds is closely tied to the duration of the bonds. The bond's term directly correlates to the amount of price volatility it exhibits.
  • Because an investor may more successfully anticipate the future path of their investment over time if an investment instrument has a longer duration, this can assist investors in better managing their future investment requirements.
  • In addition, it is a measurement of the risk that the bond poses to the change in yield as well as the bond's price.
  • The fund's average duration is another key metric since it indicates how sensitive the fund will be to changes in the interest rates offered by the market.


  • The Macaulay Duration Calculation adds a layer of complexity to the modified duration calculation.
  • To properly analyze the updated duration, the user or the investor would require the inputs of yield and tenure.
  • Because the price changes every minute, it isn't easy to get precise and current inputs from the market. This causes the computation to be inaccurate and out of date.
  • In addition, duration is an insufficient indicator of the risk inherent in the bond price and the length of the bond. When establishing reliable risk measurements, the investor must not depend simply on the duration measure.
  • It is important to note that the Macaulay duration, which calculates the weighted average period of the bond, is not necessarily an accurate indication of the risk associated with the bond.