How to Use the MDURATION Function in Excel
Introduction
This article delves into the concept of modified duration and how it is applied in MS Excel and Google Sheets. Modified duration serves as a crucial financial metric, assessing how sensitive a bond’s price is to changes in interest rates. This measurement is invaluable for investors who need to gauge how interest rate fluctuations could affect their bond holdings.
Description
Modified duration quantifies the sensitivity of a bond’s price relative to shifts in interest rates. It calculates the expected percentage change in a bond’s price resulting from a 1% variation in yield. The formula to compute modified duration is:
Modified Duration = Macaulay Duration / (1 + Yield-to-Maturity / Number of Compounding Periods)
MS Excel
In MS Excel, the MDURATION function is utilized to compute the modified duration of a bond. The syntax for the MDURATION function is:
=MDURATION(settlement, maturity, coupon, yield, frequency, [basis])- settlement: The date when the bond is officially settled.
- maturity: The date when the bond matures.
- coupon: The annual coupon rate of the bond.
- yield: The annual yield of the bond.
- frequency: The frequency of coupon payments per year (e.g., 1 for annual, 2 for semi-annual).
- basis: (Optional) The day count convention to employ (0, or omitted, for US (NASD) 30/360; 1 for actual/actual).
Here is an example demonstrating the application of the MDURATION function in Excel:
| Settlement Date | Maturity Date | Coupon Rate | Yield | Frequency | Modified Duration |
|---|---|---|---|---|---|
| 1/1/2022 | 1/1/2032 | 5% | 4% | 2 | =MDURATION(A2, B2, C2, D2, E2) |
Google Sheets
Google Sheets also incorporates the MDURATION function, functioning identically to its Excel counterpart. The syntax is the same:
=MDURATION(settlement, maturity, coupon, yield, frequency, [basis])This ensures consistency and familiarity for users switching between these two platforms.
Conclusion
Understanding modified duration is vital for bond investors to manage the risks associated with interest rate movements effectively. Through the MDURATION function available in MS Excel and Google Sheets, investors can easily calculate this metric, allowing them to make well-informed decisions about their bond portfolios.
More information: https://support.microsoft.com/en-us/office/mduration-function-b3786a69-4f20-469a-94ad-33e5b90a763c