Why is modified duration still reported in years if I am using it to estimate price sensitivity?
I understand the approximation for percentage price change, but I keep getting distracted when a table lists modified duration in years. It feels like a unit mismatch. What is the cleanest CFA exam interpretation?
Treat modified duration as an approximate percentage price sensitivity that is built from a time-weighted bond structure. That is why market tables may still display it in years even though the operational use is:
Approximate % price change = - Modified duration x change in yield
If Pine Street Water has modified duration of 4.8 and yield rises by 0.40%, the bond's price change is approximately:
-4.8 x 0.0040 = -1.92%
The exam-safe interpretation is:
- Macaulay duration tells you weighted-average time to cash recovery.
- Modified duration tells you approximate price sensitivity to a small parallel yield move.
Do not overcomplicate the label. If the answer choice is testing economic meaning, pick the price-sensitivity interpretation.
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