Sign up  |  Log in

Effective Duration = Modified Duration when Yield Curve is Flat? (for option-free bond)

Hey all!

Why is it that if the yield curve is flat, the effective duration will be equal to the modified duration for an option-free bond?

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

The difference between modified duration and effective duration is that modified duration assumes that the cash flows don’t change while effective duration allows that the cash flows might change.

For an option-free, fixed-rate bond, they’re always equal to each other.

For an option-free, floating-rate bond, they’ll be equal if (and only if) the future coupon payments are expected not to change, which will typically happen when the yield curve is flat.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thank you S2000magician!

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/