Modified duration turns a change in a gilt's yield into an estimate of how far its price moves, and a one per cent move in yield scales roughly by the duration — so the figure says as much about a holding as it does about the gilt.
What modified duration measures
Modified duration is the figure that links a change in a gilt's yield to a change in its price. It is quoted in years, and read as the percentage move in price for a one per cent move in yield: a gilt with a modified duration of eight years falls by roughly eight per cent when its yield rises by one percentage point, and rises by roughly that much when the yield falls. The site shows the figure on each gilt's own page, in the key metrics panel, and again for every holding in the risk and carry view of a portfolio.
The number is not a forecast. It is a sensitivity: it answers what happens to the price if the yield moves by a given amount, and says nothing about whether the yield will move. Two gilts with the same modified duration respond to the same yield change in the same proportion, whatever their coupons or maturities, which is what makes it useful for comparing holdings on like terms. It sits on the gilt's page beside the gross yield, so the sensitivity and the return the gilt offers can be read together. The site computes it in its own calculation layer, on the annually compounded basis (calculation version 1.6), and the figure on a page is that computed value for the day's report.
A one per cent move, worked
Because duration is a sensitivity, the step from a duration to a pound figure has a short form: the price change is roughly the modified duration times the yield change times the price. The table below runs one move all the way through, with every input stated. It is illustrative and not a figure from any gilt or any report: a holding of £10,000 nominal, a dirty price of £98.00 per £100, and a modified duration of 8.0 years, with the yield rising by one percentage point.
| Input or result | Value | Working |
| Nominal held | £10,000 | 100 units of £100 |
| Dirty price | £98.00 per £100 | illustrative |
| Market value | £9,800.00 | £98.00 × 100 units |
| Modified duration | 8.0 years | illustrative |
| Yield move | +1.00 percentage point | a 100 basis-point rise |
| Approximate price move | −8.0 per cent | −8.0 × 1.00 |
| Approximate value change | −£784.00 | −8.0% × £9,800.00 |
| Approximate new value | £9,016.00 | £9,800.00 − £784.00 |
The same result is what the site's per-holding figure gives directly. The DV01 of the holding is the modified duration times the market value divided by ten thousand — here 8.0 × £9,800 ÷ 10,000, or £7.84 for each basis point — and a hundred basis points is a hundred times that, £784.00. The DV01 is the money value of a single basis point of yield on the holding, and it sits in the risk and carry view beside each position.
From one gilt to a holding
Duration scales with what you hold, not only with what you hold it in. The modified duration is a property of the gilt; the DV01 is a property of the position, because it multiplies that duration by the money in the gilt. A small holding of a long gilt can carry less money sensitivity than a large holding of a short one, which is the point of showing both figures side by side rather than either alone.
- Modified duration, in years, tells you how sensitive the gilt's price is.
- DV01, in pounds, tells you how much money a basis point of yield is worth on the position.
- The portfolio view lists both for every holding, so the largest money sensitivities are visible without arithmetic.
- The conventional gilts list carries modified duration for every gilt in issue, so a gilt can be sized against its neighbours before it is held.
The move has to be a small one
The proportionality between duration and price change is a first-order approximation. It is faithful for small moves and less so for large ones. Price does not fall in a straight line as yield rises; it falls along a curve, and the curvature — convexity — means that a large move in yield produces a price change a little smaller than the linear estimate. On a one per cent move the difference is small enough to leave out of a rough sense of the sensitivity; on a move of several percentage points it is not, and the site's own figures are the accurate ones rather than the approximation.
There is a second limit. Duration describes the response to a parallel move in yield — every point on the curve shifting by the same amount. A move that steepens or flattens the curve instead moves a portfolio by less than its duration suggests on some holdings and more on others, because each holding's own yield changes by a different amount. The daily yield change recorded against each gilt is the figure that describes what actually happened; duration is the figure that turns it into a price move.
Background, not advice
This explains what modified duration measures and how a one per cent move becomes a price change; it is general background, not investment, tax or legal advice for any reader's circumstances. Duration is a measure of sensitivity, not a statement that a gilt is safe: a longer duration means a larger price response to a given yield change, in either direction. The figures above are illustrative, and the authoritative modified duration for any gilt is the one the site computes for the day's report, quoted on the annually compounded basis.