Modified Duration

Modified duration measures a bond’s sensitivity to interest rate changes, indicating how much its price will fluctuate if rates move by 1%. For example, a modified duration of 5 suggests that if interest rates increase by 1%, the bond’s price could decrease by approximately 5%. It helps investors assess the interest rate risk of a bond or bond portfolio, with higher modified durations indicating greater sensitivity. Essentially, it’s a tool to predict potential price changes based on changes in interest rates, aiding in investment decision-making and risk management.