Modified duration is it same as duration
And effective duration used only for
Embedded duration is it correct
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No, Modified duration and Effective duration are not the same, and they are both used for different purposes.
Modified duration measures the sensitivity of a bond’s price to changes in its yield. It is a measure of the bond’s interest rate risk, and it is calculated as the bond’s Macaulay duration divided by the sum of one plus the yield to maturity. Modified duration is commonly used by investors to evaluate the risk and return characteristics of a bond.
Effective duration, on the other hand, is a specialized measure of duration that is used to estimate the interest rate risk of bonds with embedded options, such as callable bonds or mortgage-backed securities. Effective duration measures how much the price of a bond with embedded options will change in response to changes in interest rates, taking into account the likelihood that the option will be exercised.
In summary, both modified duration and effective duration are measures of a bond’s sensitivity to changes in interest rates, but modified duration is used for traditional bonds while effective duration is used for bonds with embedded options.