Definition of Effective duration

Effective duration

The duration calculated using the approximate duration formula for a bond with an
embedded option, reflecting the expected change in the cash flow caused by the option. Measures the
responsiveness of a bond's price taking into account the expected cash flows will change as interest rates
change due to the embedded option.

Dollar duration

The product of modified duration and the initial price.

Duration

A common gauge of the price sensitivity of an asset or portfolio to a change in interest rates.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

Effective annual yield

Annualized interest rate on a security computed using compound interest techniques.

Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.

Effective convexity

The convexity of a bond calculated with cash flows that change with yields.

Effective date

In an interest rate swap, the date the swap begins accruing interest.

Effective margin (EM)

Used with SAT performance measures, the amount equaling the net earned spread, or
margin, of income on the assets in excess of financing costs for a given interest rate and prepayment rate
scenario.

Effective rate

A measure of the time value of money that fully reflects the effects of compounding.

Effective spread

The gross underwriting spread adjusted for the impact of the announcement of the common
stock offering on the firm's share price.

Macaulay duration

The weighted-average term to maturity of the cash flows from the bond, where the
weights are the present value of the cash flow divided by the price.

Modified duration

The ratio of Macaulay duration to (1 + y), where y = the bond yield. Modified duration is
inversely related to the approximate percentage change in price for a given change in yield.

Mortgage duration

A modification of standard duration to account for the impact on duration of MBSs of
changes in prepayment speed resulting from changes in interest rates. Two factors are employed: one that
reflects the impact of changes in prepayment speed or price.

Negative duration

A situation in which the price of the MBS moves in the same direction as interest rates.

Duration

The weighted average of the time until maturity of each of the
expected cash flows of a debt security

Effective Annual Yield

Annualized rate of return on a security computed using compound
interest techniques

Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.

effectiveness

a measure of how well an organization’s goals
and objectives are achieved; compares actual output results
to desired results; determination of the successful accomplishment
of an objective

Duration

The expected life of a fixed-income security considering its coupon
yield, interest payments, maturity, and call features. As market interest rates
rise, the duration of a financial instrument decreases. See Macaulay duration.

Macaulay duration

A widely used measure of price sensitivity to yield
changes developed by Frederick Macaulay in 1938. It is measured in years and
is a weighted average-time-to-maturity of an instrument. The Macaulay
duration of an income stream, such as a coupon bond, measures how long, on
average, the owner waits before receiving a payment. It is the weighted
average of the times payments are made, with the weights at time T equal to
the present value of the money received at time T.

Modified duration

The Macaulay duration discounted by the per-period
interest rate; i.e., divided by (1+rate/frequency).

effective annual interest rate

Interest rate that is annualized using compound interest.

Effective Exchange Rate

The weighted average of several exchange rates, where the weights are determined by the extent of our trade done with each country.

Policy-Ineffectiveness Proposition

Theory that anticipated policy has no effect on output.

Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees

A committee formed in response to SEC chairman Arthur Levitt's initiative to improve the financial
reporting environment in the United States. In a report dated February 1999, the committee
made recommendations for new rules for regulation of financial reporting in the United States that
either duplicated or carried forward the recommendations of the Treadway Commission.

Effective Tax Rate

The total tax provision divided by pretax book income from continuing
operations.

Panel on Audit Effectiveness

A special committee of the Public Oversight Board that was created
to perform a comprehensive review and evaluation of the way independent audits of financial
statements of publicly traded companies are performed. The panel found generally that the
quality of audits is fundamentally sound. The panel did recommend the expansion of audit steps
designed to detect fraud.

Duration

The time it takes for a policy or annuity to reach maturity.

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