How to Calculate Modified Duration

Bonds with low modified durations form more stable portfolios.

Bonds with low modified durations form more stable portfolios.

The Macaulay duration is a financial metric that takes into account a bond's maturity date, coupon and periodic yield. The modified duration is a variation on this metric that describes the bond's volatility. The modified duration represents how strongly changing interest rates affect the bond's price. For example, a modified duration of 2.3 percent means that when interest rates rise by 1 percent, the bond's price will drop by 2.3 percent.

Divide the bond's yield to maturity by the number of times that it pays interest each year. For example, if the bond offers an annual return of 6.3 percent on your investment and pays interest each quarter, divide 0.063 by 4 to get 0.01575.

Add 1 to this sum. Continuing the example, add 1 to 0.01575 to get 1.01575.

Divide the Macaulay duration by this sum. For example, if a bond has a Macauley duration of 2.83, divide 2.83 by 1.01575 to get 2.79. This is the bond's modified duration.


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