When converting Macaulay duration to modified duration, which yield should I divide by?

Use the yield per period that matches the cash-flow period used in the bond valuation.

For a semiannual-pay bond quoted at a 7.00% annual yield with semiannual compounding, the per-period yield is 3.50%. If Macaulay duration is 4.10 years, the conversion is:

Modified duration = 4.10 / 1.035 = 3.961 years

Using 1.07 would over-adjust the duration because it treats the annual yield as if it applied to each six-month period.

The exam trap is not the division itself. It is mismatching the yield convention with the coupon period.