### High coupon low duration

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The key variables which determine the interest rate risk of a bond are residual maturity, coupon rate and yield. In general:. A single measure which captures all these variables and help calculate the magnitude of change in price of a bond for one unit change in interest rate is called Modified Duration. Modified Duration is a modified version of the "Macaulay Duration", named after Frederick Macaulay who introduced it in Macaulay Duration is the weighted average maturity weighted by present value of cash flow of cash flows from a bond.

It can be calculated using following formula:. It may not be necessary to remember these formulas as there are several tools including MS-Excel which can help calculate modified duration of a bond. The table below illustrates the calculation of portfolio modified duration.

## Duration formula

Using the modified duration of a bond or a bond portfolio, expected price change can be calculated using the following equation. The table below illustrates the example of how bond prices get impacted by change in yield and portfolio modified duration. Modified duration is one of the key parameters that can be used to differentiate fixed income mutual funds. Funds with low modified duration such as cash or ultra short term debt funds have low interest rate risk and hence the growth in Net Asset Values of these funds generally tend to be quite stable.

On the other hand, long term bond funds income funds or long term gilt funds maintain high duration and hence relatively more volatile. There is a range of products between these two categories with varying degree of interest rate risk. Final Thought If the investor intends to hold the bond to maturity, the day to day fluctuations in the bonds price may not be that important.

The bonds price will change but the stated interest rate will be received.

## RBI rate cut: What should debt fund investors’ next step be?

On the other hand, instead of holding the bonds until maturity the investor can sell the bond and reinvest the money or the proceeds into another bond that pays a higher coupon rate. This has been a guide to the Coupon Rate vs Interest Rate. Here we discuss the top differences between Coupon Rate vs Interest Rate along with infographics and comparison table. You may also have a look at the following articles —. 