The first few paragraphs of this (
http://en.wikipedia.org/wiki/Bond_duration) are very useful. I had the exact same question. See the cut and paste job below:
“In
finance, the
duration of a financial asset that consists of fixed cash flows, for example a bond, is the weighted average of the times until those fixed cash flows are received. When an asset is considered as a function of yield, duration also measures the price sensitivity to yield, the rate of change of price with respect to yield or the percentage change in price for a parallel shift in yields.
The dual use of the word “duration”, as both the weighted average time until repayment and as the percentage change in price, often causes confusion. Strictly speaking,
Macaulay duration is the name given to the weighted average time until cash flows are received, and is measured in years.
Modified duration is the name given to the price sensitivity and is the percentage change in price for a unit change in yield. When yields are continuously compounded Macaulay duration and modified duration will be numerically equal. When yields are periodically compounded Macaulay and modified duration will differ slightly, and there is a simple relation between the two. Modified duration is used more than Macaulay duration.”