Another term for modified duration; a tool that is used to measure the change in the value of a financial instrument (a fixed-income instrument) in response to a change in interest rates. In other words, adjusted duration is usually used as a basis for comparing the effect of change in interest rates on prices of instrument such as bonds, notes, swaps, etc. The following formula is typically used to calculate adjusted duration:

D_adjusted= [1/(1 + (y/f))] D_mac

Where: y is yield to maturity; f is frequency of coupon payment; D_mac is Macaulay duration.

Suppose Macaulay duration is 5, yield to maturity is 6%, and the bond pays interest two times a year:

D_adjusted= [1/(1+ (0.06/2))] ×5 = 4.8544

This means the bond’s adjusted duration is 4.8544 years, or that the price of the bond will change by approximately 4.8544% for a 100 basis point change in yield.