A bond duration that expresses the bond yield with a compounding frequency of a specific number of time per year, rather than with continuous compounding (cc). It indicates the percentage change in the price of a bond for a given change in yield. This applies to the “dirty price” of the bond (i.e., its price and any accrued interest).
For example, a bond is currently trading at $95, with a duration of 2.7 years. If its yield, calculated with continuous compounding is 12.5%, then its modified duration would be:
The modified duration is 2.54 years (i.e., two years, 6 months, 14 days, etc).
The modified duration helps simplify the duration relationship to:
ΔP= – P × D* × Δy
Where:
ΔP is the change in bond price, D* is the modified duration, Δy is the change in yield.
Modified duration is also known as adjusted duration.
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