What is effective duration?

Effective duration calculates the expected price decline of a bond when interest rates rise by 1%. The value of the effective duration will always be lower than the maturity of the bond. A bond with embedded options behaves like an option-free bond when exercising the embedded option would offer the investor no benefit.

What is duration duration?

Duration Duration is a risk measure used by market participants to measure the interest rate sensitivity of a debt instrument, e.g. a Bond. It tells how sensitive is a bond with respect to the change in interest rates. This measure can be used for comparing the sensitivities of bonds with different maturities.

Why is effective duration important?

The effective duration helps calculate the volatility of interest rates in relation to the yield curve and therefore the expected cash flows from the bond. Effective duration calculates the expected price decline of a bond when interest rates rise by 1%. The value of the effective duration will always be lower than the maturity of the bond.