Skip to content

Demo environment. Sample data and demo handoffs only — no real accounts or transactions.

GlossaryFixed income

Modified duration

An estimate of how much a bond’s price changes, in percent, for a one percentage point change in interest rates.

Modified duration turns duration into a direct estimate of price sensitivity. If a bond or debt fund has a modified duration of 4, a one percentage point rise in interest rates would be expected to reduce its price by roughly 4%, and a one point fall to raise it by roughly 4%.

Why it matters

It is the quickest way to translate an interest rate move into a likely change in value. Debt fund investors can use it to understand why a fund’s NAV moved when rates changed, and how much movement to expect in future.

How to read it

  • Multiply modified duration by the change in yield, in percentage points, to estimate the percentage price change — with the opposite sign.
  • It works best for small rate changes. For large moves the estimate becomes less accurate, because the price–yield relationship is curved (a property called convexity).
  • Compare it with your horizon. A fund with a modified duration of 6 can see meaningful NAV swings over months, even if it holds high-quality bonds.

Common misconceptions

  • “Government bonds can’t lose value.” Government securities carry very low credit risk, but long-duration ones can fall noticeably in price when interest rates rise.
  • “Modified duration is measured in years.” It is derived from duration but is best read as a sensitivity: percent change in price per percentage point change in yield.
  • “It tells me which way rates will move.” It tells you how much prices may react, not what rates will do.

In India: Debt fund factsheets commonly publish modified duration alongside Macaulay duration and YTM.

Formula

Modified duration = Macaulay duration ÷ (1 + y ÷ k), where y is the yield and k the number of coupon payments a year. Approximate % price change ≈ −Modified duration × Change in yield (percentage points)

Worked example

For illustration, assume a bond with a Macaulay duration of 2.78 years and an 8% annual yield. Modified duration = 2.78 ÷ 1.08 ≈ 2.57. If yields rise by 0.5 percentage points, the price would be expected to fall by about 2.57 × 0.5 ≈ 1.3%.

Figures are for illustration only — not a forecast or a recommendation.

Related terms

  • Duration

    The weighted average time, in years, to receive a bond’s cash flows — and a guide to how sensitive its price is to interest rates.

  • Interest rate risk

    The risk that a bond’s price falls when market interest rates rise — larger for bonds and debt funds with longer duration.

  • YTM

    Yield to Maturity

    The annualised return on a bond bought at today’s price and held to maturity, if every payment arrives as promised and coupons are reinvested at that rate.

  • G-Sec

    Government Security

    A tradeable debt instrument issued by the central or a state government to borrow money, carrying very low credit risk in the domestic market.

  • Debt

    Lending money in return for interest — through bonds, deposits or debt mutual funds — with returns driven mainly by interest rates and credit quality.