12.

The modified duration is equal to and sometimes referred to as Macaulay duration divided by one plus the bond's required yield per coupon period. Modified (or effective) duration is a good approximation of price changes for an option-free (non-callable) bond, but it's only good for relatively small changes in interest rates. As rate changes grow larger, the curvature of the bond price/yield relationship becomes more prevalent, meaning that a linear estimate of price changes will contain errors. Modified duration is a linear estimate, as it assumes that the price change will be the same regardless of whether interest rates go up or down.

l: Describe the various ways that duration has been interpreted and why duration is best interpreted as a measure of a bond's or portfolio's sensitivity to changes in interest rates.

The modified duration is equal to and sometimes referred to as Macaulay duration divided by one plus the bond's required yield per coupon period. Modified (or effective) duration is a good approximation of price changes for an option-free (non-callable) bond, but it's only good for relatively small changes in interest rates. As rate changes grow larger, the curvature of the bond price/yield relationship becomes more prevalent, meaning that a linear estimate of price changes will contain errors. Modified duration is a linear estimate, as it assumes that the price change will be the same regardless of whether interest rates go up or down.

l: Describe the various ways that duration has been interpreted and why duration is best interpreted as a measure of a bond's or portfolio's sensitivity to changes in interest rates.