A working example of effective durationĀ calculation. Earlier we had reviewed the calculation process for Macaulay and Modified Duration. In this post we will focus on the steps for calculating Effective Duration.

## Effective Duration

Effective Duration is calculated using the following formula:

Where,

Delta_i= change in yield = 1%

P_{0}= Initial Price

P_{+}= Price if yields increase by Delta_i

P_{–}= Price if yields decline by Delta_i

We are calculating the effective duration of the sample instrument on the issue date. Therefore P_{0} is equal to the price calculated above, i.e. 98.1666.

To calculate P_{+} we use the same methodology for calculating the initial price but assume that the YTM has increased by 1% to 13%.