Effective duration is calculated using the formula:
Effective Duration=2×P0×ΔyP−Δy−P+Δy
Where:
- P0 is the current price.
- P−Δy is the price when yield decreases by Δy (Price up).
- P+Δy is the price when yield increases by Δy (Price down).
Current price (P0):
- N = 15
- FV = 100
- I/Y = 8.2
- PMT = 7
- CPT PV = 89.8529
Price when yield decreases (P−Δy):
- N = 15
- FV = 100
- I/Y = 7.9 (8.2% - 30 basis points)
- PMT = 7
- CPT PV = 92.2492
Price when yield increases (P+Δy):
- N = 15
- FV = 100
- I/Y = 8.5 (8.2% + 30 basis points)
- PMT = 7
- CPT PV = 87.5436
Effective Duration=2×89.8529×0.00392.2492−87.5436=0.53911744.7056≈8.73