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Finance Dictionary and Glossary of Investment Terms
effective duration
Definition 1.
The duration for a bond with an embedded option when the value is calculated to include the expected change in cash flow caused by the option as interest rates change. This measures the responsiveness of a bond's price to interest rate changes, and illustrates the fact that the embedded option will also affect the bond's price.
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Definition 2.
A duration calculation for bonds with embedded options. Effective duration takes into account that expected cash flows will fluctuate as interest rates change.
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Definition 3.
e duration calculated using the approximate duration formula for a bond with an embedded option, reflecting the expected change in the cash flow caused by the option. Measures the responsiveness of a bond's price-taking into account that expected cash flows will change as interest rates change due to the embedded option.
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