How do Macaulay duration, modified duration, effective duration, and DV01 fit together?

Question

AcadiFi · Accepted Answer

The easiest way to organize duration measures is to ask what each one is trying to express. Macaulay duration is a weighted-average timing measure in years. Modified duration converts that timing idea into approximate percentage price sensitivity for a small yield change. Effective duration is used when cash flows can change with rates, so it captures embedded-option behavior. DV01 turns rate sensitivity into money terms for a specific position size.

Suppose Crestline Fixed Income holds a bond portfolio worth $12 million. If modified duration is 4.8, a 100-basis-point parallel rise suggests about a 4.8 percent price decline, or roughly $576,000. DV01 then scales that down to the dollar effect of a 1-basis-point move, about $5,760 in this simplified setup.

```mermaid
flowchart TD
  A[Macaulay duration] --> B[Timing in years]
  B --> C[Modified duration]
  C --> D[Percent price change]
  D --> E[DV01]
  A --> F[Effective duration when cash flows can change]
```

The exam trick is not to memorize the names alone. It is to know which measure matches the instrument and the sensitivity language the question is using. Once you map years, percent, and dollars, the topic becomes much less slippery. Practice more in our FRM question bank.

How do Macaulay duration, modified duration, effective duration, and DV01 fit together?

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