Duration

Ludwma

Member
Subscriber
Hi David,

If there will be a question like... compute the duration... which one we should compute? I mean the modified or the macaulay...

Thanks,

FS
 

David Harper CFA FRM

David Harper CFA FRM
Subscriber
Hi FS,

The question should specify, but you are generally okay to seek (by default) to find the modified duration, unless told otherwise, as the modified duration:
  • Is the accurate sensitivity
  • Informs the DV01 (i.e., = modified duration*P/10000 ) and the basis for hedging
  • Is the duration estimated by effective duration
The most common occurrence of the Macaulay duration, of course, is that the Mac duration of a zero-coupon bond equals maturity. So, it's common exam practice to give you a T-year zero-coupon bond, because it's Macaulay duration = T and its modified duration = T/(1+yield/k). Good luck on the exam!
 
Top