What does a modified duration of 7 mean?

Modified duration of 7 means a 1% (100 bps) increase in yield will cause approximately a 7% decrease in bond price, and vice versa. The approximation is linear and breaks down for large yield changes where convexity becomes significant.

How is modified duration used in portfolio hedging?

To hedge a bond portfolio against interest rate risk, match the dollar duration (DV01) of the portfolio with an equal and opposite position in futures or swaps. The notional hedge ratio = portfolio DV01 / hedging instrument DV01.

Modified Duration from Macaulay Duration

Convert Macaulay duration to modified duration (Macaulay duration divided by 1 plus periodic yield) to measure price sensitivity: a 1% yield rise causes approximately modified duration percent price decline.

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How to Use

Enter the values for the scenario you are assessing. Convert Macaulay duration to modified duration (Macaulay duration divided by 1 plus periodic yield) to measure price sensitivity: a 1% yield rise causes approximately modified duration percent price decline. Use the modified duration result to inform your calculation.

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