QUICK DEFINITION
Effective Duration is a duration measure that estimates price sensitivity when a bond's expected cash flows may change as yields move.
WHY IT MATTERS
Why Effective Duration matters in bond markets
It is particularly useful for callable bonds, mortgage-backed securities and other instruments with embedded options.
MARKET CONTEXT
How to think about it
Bond investors use effective duration as part of a wider framework that links prices, yields, cash flows, liquidity and risk. The concept should therefore be read together with its related terms rather than as an isolated definition.
Is Effective Duration important for fixed-income investors?
← Back to the Bond Market Glossary Yes. It is particularly useful for callable bonds, mortgage-backed securities and other instruments with embedded options.