Modified duration is a financial metric that measures the sensitivity of a bond's price to changes in interest rates, providing an estimate of how much a bond's price will change for a 1% change in yield. It improves upon Macaulay duration by accounting for the bond's yield to maturity, offering a more precise tool for managing interest rate risk.

Modified Duration

Modified duration

financial metric

sensitivity of a bond's price

changes in interest rates

bond's price

change in yield

Macaulay Duration is a measure of the weighted average time until a bond's cash flow payments are received, helping investors assess interest rate risk and evaluate bond price volatility. It is particularly useful for determining a bond portfolio's immunization strategy by aligning the duration with the investment horizon to minimize interest rate exposure.

Macaulay duration

Yield to Maturity (YTM) is the total return anticipated on a bond if it is held until it matures, accounting for all interest payments and the difference between the purchase price and par value. It is a crucial measure for investors, as it provides a comprehensive view of the bond’s profitability, assuming stable interest rates and no default risk.

yield to maturity

Interest rate risk refers to the potential for investment losses due to fluctuations in interest rates, which can affect the value of fixed-income securities like bonds. It is a critical consideration for investors and financial institutions as changes in interest rates can impact borrowing costs, investment returns, and overall economic conditions.

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