gargi.adhikari
Active Member
In reference to Valuation & Risk Models- Tuckman-Chapter 4-> TOPIC : Modified Duration vs. Effective Duration
The Instructional Video says the Modified Duration = the Effective Duration
the formula for the Effective Duration is given to be : [ Price (y-) - Price (y+) ] / 2* Price * (Change in Yield)
But, if the Modified Duration = Dollar Duration/ Price= [ Price(y-) - Price (y+) ] / Price , then how does the 2(Change in Yield) factor in? I do understand that dividing by the change in Yield gives us the slope but then the formula becomes different from that of Modified Duration. In that case, how can we say Modified Duration = the Effective Duration. Also, where does the 2 come from ? Is it because it is semi annual ?
The Instructional Video says the Modified Duration = the Effective Duration
the formula for the Effective Duration is given to be : [ Price (y-) - Price (y+) ] / 2* Price * (Change in Yield)
But, if the Modified Duration = Dollar Duration/ Price= [ Price(y-) - Price (y+) ] / Price , then how does the 2(Change in Yield) factor in? I do understand that dividing by the change in Yield gives us the slope but then the formula becomes different from that of Modified Duration. In that case, how can we say Modified Duration = the Effective Duration. Also, where does the 2 come from ? Is it because it is semi annual ?
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