Effective duration
Fixed IncomeDefinition
Duration measure that incorporates the bond's embedded options (callability, prepayability). Standard for MBS and callable corporates.
For an MBS: as rates fall, prepayment expectations rise, effective duration shrinks. As rates rise, effective duration extends. This produces "negative convexity" — exactly opposite the price-yield curve of a regular bond.
For an MBS: as rates fall, prepayment expectations rise, effective duration shrinks. As rates rise, effective duration extends. This produces "negative convexity" — exactly opposite the price-yield curve of a regular bond.
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