Effective duration

What it means

Duration measured by repricing the bond under small parallel shifts in the benchmark curve, so that changes in cash flows are captured.

The exam angle

The only valid duration for callable, putable and mortgage-backed bonds, where the cash flows themselves depend on rates.

Where it appears in the syllabus

• Fixed IncomeCFA Level I · exam weight 11–14% · Pricing, yield measures, duration, convexity, credit spreads.
• Fixed IncomeCFA Level II · exam weight 10–15% · Term structure dynamics, arbitrage-free valuation, embedded options, CDS.
• Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.

See it worked through

• Duration and convexity: how good is the approximation?A ten-year bond repriced at four yield shocks, exactly and with the duration and convexity estimates.

There is also a short video: watch it on YouTube.

Related terms

• ConvexityThe curvature of the price–yield relationship — how duration itself changes as yields move.
• DurationThe sensitivity of a bond’s price to a change in yield, and equivalently the weighted average time to receiving its…
• Callable bondA bond the issuer may redeem early, usually when rates have fallen.
• Forward rateThe interest rate agreed today for borrowing or lending over a future period, implied by today’s spot curve.
• Spot rateThe yield on a single cash flow received at one future date, with no intervening coupons.
• Coupon rateThe annual interest a bond pays, as a percentage of par.