A bond duration that expresses the bond yield with a compounding frequency of a specific number of time per year, rather than with continuous compounding (cc). It indicates the percentage change in the price of a bond for a given change in yield. This applies to the “dirty price” of the bond (i.e., its price and any accrued interest).

For example, a bond is currently trading at $95, with a duration of 2.7 years. If its yield, calculated with continuous compounding is 12.5%, then its modified duration would be:

The modified duration is 2.54 years (i.e., two years, 6 months, 14 days, etc).

The modified duration helps simplify the duration relationship to:

ΔP= – P × D^* × Δy

Where:

ΔP is the change in bond price, D^* is the modified duration, Δy is the change in yield.

Modified duration is also known as adjusted duration.