If the market interest rates go up, the price of a bond (representing a loan) falls. This is because the bond pays a fixed interest and the person now buying it from the market expects a higher return. That person is now willing to pay less for the fixed interest bond – effectively increasing the return. Thus interest rates and bond prices move in opposite directions. Modified Duration, expressed in years, measures a bond’s price change to a 1% change in interest rates. In general, the lower the Modified Duration, the lower the risk.
Modified Duration
