Effective duration
A measure of price sensitivity to rates obtained by revaluing the bond up and down; it works where the cash flow itself depends on the rate.
Formula
Prices under a downward and an upward shift of yield are related to the starting price and to the size of the shift. The cash flow is recomputed in each scenario, which is what separates this from ordinary duration.
How to read the number
For issues with a put date, amortisation or a floating coupon it is the only correct measure of interest rate risk.
When the metric lies
Also known as: option-adjusted duration