Modified duration

The approximate percentage a bond's price moves for a one point change in yield. A straight line drawn against a curve, so it is only good for small moves.

Where you will meet it

Modified duration appears in 11 learning outcomes on the CFA syllabus. A few of them:

• Use modified duration to estimate how a bond's price will change
  CFA Level I · Fixed Income

  “Modified duration measures how much a bond's price moves for a small change in yield: the approximate percentage price change is minus modified duration times the change in yield.”

• Explain the term structure of yield volatility and how it influences the volatility of prices
  CFA Level II · Fixed Income

  “Price volatility, however, is roughly modified duration multiplied by yield volatility.”

• Show how exposure measures for equities, fixed income, and options can help gauge and control market risk and volatility risk
  CFA Level II · Portfolio Construction

  “For bonds, the percentage price change is approximately −modified duration × Δy + ½ × convexity × (Δy)².”

• Explain what drives the return on a bond portfolio when benchmark yields change
  CFA Level III · Portfolio Management Pathway

  “When benchmark yields move, the percentage price change is approximately −(modified duration × Δy) + ½ × convexity × (Δy)².”

Learn it properly

• Duration and convexity explained: how far a bond price moves Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with M · Glossary