Page 12 - FINAL CFA SLIDES DECEMBER 2018 DAY 15

Session Unit 16:
54. Understanding Fixed Income Risk and Return

Example, p.106: Calculating approximate modified duration: For a 20-year, 4% annual-pay bond currently
trading at par, calculate the approximate modified duration based on a change in yield of 25 basis points.

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• Note that modified duration is a linear estimate of the relation between a bond’s price and YTM,

whereas the actual relation is convex, not linear.

• This means that the modified duration measure provides good estimates of bond prices for small

changes in yield, but increasingly poor estimates for larger changes in yield as the effect of the
curvature of the price-yield curve is more pronounced.