Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates.
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Bond prices and yields move in opposite directions, which often confuses new investors. Bond prices and yields act like a seesaw: when bond yields go up, prices go down, and when bond yields go down, prices go up.

In other words, an upward change in the 10-year Treasury bond's yield from 2.2 percent to 2.6 percent indicates negative market conditions because the bond's interest rate moves up when the market trends down.

Consider a new corporate bond that becomes available on the market in a given year with a coupon of 4 percent, called Bond A. Prevailing interest rates rise during the next 12 months, and one year later the same company issues a new bond, called Bond B, but this one has a yield of 4.5 percent.

So, why would an investor purchase Bond A with a yield of 4 percent when he or she could buy Bond B with a yield of 4.5 percent? Nobody would do that, so the price of Bond A needs to adjust downward to attract buyers. But how far does its price fall?

Since the coupon always stays the same, the bond's price must fall to $900 to keep bond A’s yield the same as Bond B. Why? Because $40 divided by $900 equates to a 4.5 percent yield. You won't find the relationship this exact in real life, but this simplified example helps provide an illustration of how the process works.