Fixed Income: Effective duration (FRM T4-34)

Effective duration approximates modified duration. Both express interest rate sensitivity: an effective (or modified) duration of 6.2 years tells us to expect a 0.620% price change if the yield changes by 10 basis points; i.e., 0.10% ∆y * 6.2 years = 0.620% ∆P. Effective duration is given by -1/P * [P(+∆y) - P(-∆y)]/(2*∆y) where ∆y is our selected, small yield shock. This video explain the intuition which is that we use effective duration when it's more realistic to retrieve to slope of a secant line, as an approximation to the exact slope of the nearby tangent line. Effective duration is appropriate when the price/yield relationship is non-trivial (e.g., embedded options cause negative convexity) and therefore doesn't lend itself to an easier, analytical modified duration. Discuss this video here in our FRM forum: trtl.bz/2YMGSs9
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[@asmomair]

I don’t know if people have patience to go deep down into your insightful interpretation, but once they do, it will surely pay off. Ah, I have enjoyed every bit of your explanation. Thanks so much.

[@Jason-xe4tt]

I really like this prof, sometimes (more than half) whether a course is interesting depends on the prof and you are the one =)

[@e505mp95]

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[@bionicturtle]

Thank you for your kind feedback, it's our pleasure to help (the bond durations are not easy)!

[@bhumanyusingh6347]

Is duration of the option on bond the same as the rho of the option since we are measuring the change in yield of bond which should correlate to the change in the risk free rate

[@bhanulathavedagiri6727]

Dollar. DURATION here refers to THYROID problem and the early good morning. Pakka local.

[@arjavjain5671]

/???

[@mpvl6810]

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