Duration measures:

Question

Duration measures:

BlackTom AI · Accepted Answer

The question presents several statements about duration measures and asks to evaluate them. 
Option 1: 'All of the above' would be correct if all the other statements are true. To determine that, we assess each statement individually. 
Option 2: 'The effective economic life of a financial instrument considering the timing of all cash flows' This is a valid way to describe duration in the sense that it accounts for when cash flows occur and the instrument’s overall economic life, not just the nominal maturity.
Option 3: 'The weighted average time to maturity of an asset’s cash flows, with weights based on present values' This aligns with the classical Macaulay duration concept, where each cash flow is weighted by its present value and the times are averaged; hence it is an accurate description of duration in its standard formulation.
Option 4: 'The sensitivity of an asset’s or liability’s price to changes in interest rates' This reflects the concept of modified duration, which translates changes in interest rates into approximate percentage changes in price, so it is also a correct characterization of duration-related measures.

Now, considering each option:
- Option 2 correctly emphasizes the timing of cash flows and the instrument’s economic life, which is central to duration concepts.
- Option 3 accurately captures the Macaulay duration mechanics using present-value weights, which is a foundational duration metric.
- Option 4 captures the practical pricing sensitivity interpretation via modified duration, a widely used derivative of duration for price change estimation.

Since all three statements 2, 3, and 4 are correct descriptions of duration concepts, Option 1 ('All of the above') is the correct choice in this multiple-choice setup.

In sum:
- Option 1: All of the above — correct, because options 2, 3, and 4 are valid descriptions of duration.
- Option 2: True in the sense of duration addressing cash-flow timing and economic life.
- Option 3: True as Macaulay duration uses a present-value weighted average time to cash flows.
- Option 4: True as duration is related to price sensitivity to interest rate movements via modified duration.

BU.231.710.51.FA25 The Final Exam

Duration measures:

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