G.1.6 Approximation Using Duration

Question 1

what is the approximation formula for the change in price due to a change in yield using MacD?

Answer 1

P_i_1 ≈ P_i_0 (1 + i_0)/(1 + i_1)^MacD

Interest rates must be in the form of effective annual rates since MacD is in years

Question 2

If all of the future cash flows are positive, what can we say abt the approximation the change in price using MacD vs ModD?

Answer 2

If all of the future cash flows are positive, then the approximation of the change in price using MacD is better than the approximation of ModD