In fixed income
, an estimate of the price volatility
of a bond
. Longer duration bonds are more sensitive to changes in rates than shorter duration bonds.
The percentage change in price for a bond equals the modified duration times the change in yield times -1.
(delta p = mdur * delta i * -1)
For example, using modified duration one would predict that a bond with a modified duration of 5.0 would fall in value (i.e. price) 5% given a 1% rise in interest rates.
To calculate modified duration, take Macaulay duration and divide it 1+ (yield/k), where k is the number of coupon payments per year (typically 2).