Modified duration.

In plain English

Modified duration converts a bond's cash flow timing into a single sensitivity number, giving the approximate percentage price change for a one point move in interest rates. It is derived from Macaulay duration, the weighted average time until the bond's payments arrive, adjusted for the bond's yield. Longer maturities, lower coupons, and lower yields all push duration higher, which means more price movement for the same rate change. The relationship runs in reverse: rates up, prices down. The estimate is a straight-line approximation that works well for small moves and misses for large ones, which is where convexity comes in.

01Why it matters

Duration turns a vague worry about rising rates into a number, so the likely price hit on a specific bond or bond fund can be estimated before rates move.

02The math, step by step

A bond fund reports an average modified duration of 7 years. Rates rise 1 percentage point. The estimated price decline is about 7 percent, so a 50,000 position falls roughly 3,500 in market value, offset over time by reinvesting at the new higher rate.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.