G13 Modified Duration Pt1

Question 1

what is Modified Duration?

Answer 1

Its how we judge price sensitivity of a collection of cash flows occuring at different times

Question 2

what is the eqn for Modified Duration?

Answer 2

ModD = P’_i_0/P_i_0

Question 3

how do you estimate price sensitivty with Modified duration?

Answer 3

%ΔP ≈ -Δi * MoD

ΔP ≈ -Δi * ModD * P_i_0

Note: i could be expressed in any form, e.g. as a nominal annual yield or an effective rate over some period