Effective Duration

Glossary

Banking

Effective Duration

Effective duration is a proxy for measuring the price sensitivity of callable bonds (where the existence of call options renders cash flows uncertain) to changes in the risk-free yield curve as a result of changes in interest rates. Effective duration differs from modified duration as the latter calculates duration based on a bond’s own cash flows and price while the former is based on modelled changes to the price due to movements in interest rates, including changes due to optionality.

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