The modified duration measures how sensitively a fixed income bond reacts to fluctuations in market interest rates. In other words, it acts as a multiplier of the interest rate development and enables the calculation of the percentage change in the price of a security when immediate and parallel interest rate developments occur.
For example, when interest rates rise, modified duration penalizes bonds with longer durations the most. On the other hand, longer duration bonds also see the greatest gains when interest rates fall.
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