Modified duration
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
Macaulay duration divided by (1 + y/k), where y is yield-to-maturity and k is coupon periods per year; measures the approximate percentage change in bond price for a 100 bp yield change.
Modified duration in plain English
A bond's price falls when interest rates rise, and modified duration is the number that tells you roughly how much. If a bond has a modified duration of 5, its price drops about 5% when rates rise by 1 percentage point (100 'basis points'), and rises about 5% when rates fall by the same amount. Think of it as the bond's sensitivity dial — a bigger number means the price swings more for the same change in rates, which is why long-term bonds are riskier when rates move. It's calculated by taking a related measure (Macaulay duration) and scaling it down slightly with (1 + y/k), where y is the bond's yield and k is how many times a year it pays interest.
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