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What is the difference between Macaulay duration and modified duration?
The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. Conversely, the modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.
What is meant by duration explain the relationship between duration and price change?
Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes. Macaulay duration estimates how many years it will take for an investor to be repaid the bond’s price by its total cash flows. Modified duration measures the price change in a bond given a 1\% change in interest rates.
What is Macaulay duration Quora?
Macaulay duration is the weighted average time to cash flow, weighted by the present value of the flow. Modified duration is the derivative of the price of the bond with respect to yield.
What’s the difference between duration and modified duration?
1. Duration or Macaulay Duration refers to measurement of weighted average time before having the cash flow, while Modified Duration is more on the percentage change in price in terms of yields.
What is the difference between effective duration and modified duration?
Effective duration differs from modified duration because the latter measures the yield duration – the volatility of the interest rates in terms of the bond’s yield to maturity – while effective duration measures the curve duration, which calculates the interest rate volatility using the yield curve.
How do you interpret Macaulay duration?
Macaulay duration can be viewed as the economic balance point of a group of cash flows. Another way to interpret the statistic is that it is the weighted average number of years that an investor must maintain a position in the bond until the present value of the bond’s cash flows equals the amount paid for the bond.
What is the difference between the term structure of interest rates and the yield curve?
There is no difference between term structure and a yield curve; the yield curve is simply another name to describe the term structure of interest rates.
Macaulay duration and modified duration are chiefly used to calculate the durations of bonds. The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is a change in the yield to maturity.
What is the relationship between yield to maturity and duration?
Macaulay duration also demonstrates an inverse relationship with yield to maturity. A bond with a higher yield to maturity shows a lower Macaulay duration. Modified duration is another frequently used type of duration for bonds.
Why is the Macaulay duration of a bond higher at maturity?
With all the other factors constant, a bond with a longer term to maturity assumes a greater Macaulay duration, as it takes a longer period to receive the principal payment at the maturity. It also means that Macaulay duration decreases as time passes (term to maturity shrinks).
What is modified duration of a bond?
The modified duration of a bond is an adjusted version of the Macaulay duration and is used to calculate the changes in a bond’s duration and price for each percentage change in the yield to maturity.