In what way is the so called modified duration measure a modification of the Macaulay measure?
Ans. For calculating Modified duration, we first need to calculate Macaulay measure. The formula of modified duration divides the Macaulay measure by 1 plus bond’s average yield to maturity which is obtained by dividing YTM by n. Modified duration is calculated as:
n = number of coupon periods per year measure
YTM = the bond’s yield to maturity
Hence, it is modification of Macaulay’s measure.
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