What is the modified time?
and Modified duration is a process that identifies the amount of change of value that specific security of experience when changing interest rates. The idea of this type of measurement is that bond prices and interest rates tend to move in different directions. This means that if the interest rate associated with the bond problem increases, the price of the bond will decrease.
When understanding the concept of modified duration, it is important to note that the price of bonds and the value of the bond problem is not necessarily the same. The price of bonds is simply the amount that the issuing entity applies for a bond. On the other hand, the value of the bond is based on more criteria than the simply required price. The distinction between these two makes it easier to understand how the modified period works, because the price of bonds does not respond to interest changes in the same way as the value of the bond reacts.
One factor that affects the value of the bond is the degree of risk associated with the problem. Though somewhatD Subjective, this factor may indicate that although the relationship between interest rate and bond price is constant, questions about the stability of entity issuing bond may mean that there is a greater risk. Another risk may have a negative impact on the value of the bond in terms of the number of investors who are willing to buy bond problems without necessarily affecting any influence on the price of bonds.
The basic formula for calculating the modified time includes comparison of the current price and interest rates associated with the bond problem. In most situations, these two factors will move in opposite directions. This means that if interest rates rise, the price of bonds may drop and bonds worth investors who consider this problem desirable because of a chance to get a higher return, while Making smaller investments. If the interest rate decreases, the bond becomes less attractive to investors and the value for investors is likely to decrease appropriately.Once the comparison is carried out, it is possible to determine what shift at the interest rate would make the value of the bond between the change and the maturity of the bond.
In actual practice, this means that the modified time uses a formula with one plus proceeds to maturity to determine the impact of the change in interest rate on the value of the bond. Although this may seem somewhat intricate, this process is not predicting a change that occurs with a mortgage bearing a floating or variable rate. By identifying an interest rate change, the investor can determine what type of return can be reasonably expected for the life of the bond if this change should actually occur.