Duration

[Ludwma]

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]

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!