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In contrast to Macaulay duration, modified duration (sometimes abbreviated MD) is a price sensitivity measure, defined as the percentage derivative of price with respect to yield (the logarithmic derivative of bond price with respect to yield). [15] Modified duration applies when a bond or other asset is considered as a function of yield.
For example, for small interest rate changes, the duration is the approximate percentage by which the value of the bond will fall for a 1% per annum increase in market interest rate. So the market price of a 17-year bond with a duration of 7 would fall about 7% if the market interest rate (or more precisely the corresponding force of interest ...
The more curved the price function of the bond is, the more inaccurate duration is as a measure of the interest rate sensitivity. [2] Convexity is a measure of the curvature or 2nd derivative of how the price of a bond varies with interest rate, i.e. how the duration of a bond changes as the interest rate changes. [3]
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Within this time frame, there are short-term bonds (1-3 years), medium-term bonds (4-10 years) and long-term bonds (10 years or more). At the end of this term, known as the maturity date, the full ...
A five-year duration means the bond or bond fund could lose 5 percent of its value for every one-percentage point rise in prevailing interest rates, while a drop in rates would push the bond price ...
The duration of an equity is a noisy analogue of the Macaulay duration of a bond, due to the variability and unpredictability of dividend payments. The duration of a stock or the stock market is implied rather than deterministic. Duration of the U.S. stock market as a whole, and most individual stocks within it, is many years to a few decades.
This is equal to the Macaulay duration times the discount rate, or the modified duration times the interest rate. If the elasticity is below -1, or above 1 if the absolute value is used, the product of the two measures, value times yield or the interest income for the period will go down when the yield goes up.