Fixed Income
Effective Duration
Definition
What is Effective Duration?
A durationA measure of a fixed-income portfolio's sensitivity to changes in interest rates. measure that estimates price sensitivity when cash flows may change because of embedded options.
Example in practice
How This Looks in Practice
Analysts use effective duration for mortgage-backed securities.
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Related Terms
Fixed Income
Bond
A debt security through which an investor lends money to an issuer in return for promised payments.
Fixed IncomeIssuer
The government, company, or organisation that creates and sells a security.
Fixed IncomeFace Value
The principal amount stated on a bond and usually repaid at maturity.
Money MarketsTreasury Bill
A short-term government debt instrument usually issued at a discount and repaid at face value.