Terms

Modified Duration

Modified Duration is a metric that measures a bonds sensitivity to changes in yield

  • The math behind it is complicated
  • The rule of thumb is that duration measures the percentages change in the bonds price for a 1% change of yield
  • Can be applied to any  income security or security with similar attributes (not just bonds) - REITS, Loans, etc.

Example

  • Assume a US Treasury Bond has  a Duration of 7.5
  • If interest rates move up by 1%,  expect the price of the bond to drop by 7.5%
  • If interest rates drop by 1%, expect the price of the bond to increase by 7.5%