What is the practical difference between Macaulay duration and modified duration?
Macaulay duration is about timing. It is the present-value-weighted average time until the investor receives the bond's promised cash flows. It helps explain why a coupon bond has duration below maturity and why a zero-coupon bond has duration equal to maturity.
Modified duration is about price sensitivity. It estimates the percentage price change for a small change in the bond's own yield, assuming cash flows do not change. In many exam questions, Macaulay duration is the conceptual anchor and modified duration is the risk estimate.
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