Page 11 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

Session Unit 16:
Approximate Modified Duration, p.105
54. Understanding Fixed Income Risk and Return

The calculation of approximate modified
duration is based on a given change in YTM.
• V– is the price of the bond if YTM is

decreased by ΔYTM; and
• V+ is the price of the bond if the YTM is
increased by ΔYTM.
tanties

Note that V– > V+. Because of the convexity of the price-yield relationship, the price increase (to
V>–), for a given decrease in yield, is larger than the price decrease (to V+).

• V0, the current bond price, is in the denominator to convert this average price change to a %;
• The ΔYTM term is in the denominator to scale the duration measure to a 1% change in yield by

convention (ΔYTM must a decimal (rather than in a whole %) to properly scale the duration estimate.