Which of the following statements regarding the application of duration is most accurate?

Question

BlackTom AI · Accepted Answer

Let's carefully assess each statement about duration in the context of fixed-income instruments.
Option 1: 'Duration is used to compute an exact price impact from a change in yield.' This is misleading because duration provides a linear approximation of price change for small yield shifts, not an exact price change. For larger yield moves, curvature or convexity matters and improves accuracy. So this statement overstates what duration can deliver.
Option 2: 'Yield curve risk does not impact duration.' In reality, duration is influenced by the structure of cash flows and yield levels; different yield curve scenarios can affect the effective sensitivity of a bond's price. Saying yield curve risk has no impact ignores a key source of risk and the fact that duration can vary with changing discount rates and options in the instrument. Therefore this is incorrect.
Option 3: 'The duration of a zero coupon bond is less than its time to maturity.' For a zero coupon bond, the Macaulay duration equals the time to maturity (and the modified duration is slightly less than that, but not by being less than the time to maturity in the common interpretation). The statement as written asserts a relationship that is not true in the standard duration framework, making it inaccurate.
Option 4: 'Effective duration is useful for bonds with embedded options.' This is correct because effective duration specifically accounts for changes in a bond's cash flows when there are embedded options (like calls or puts) by modeling how the option-adjusted value responds to yield movements, capturing the optioned nature of the cash flows. This makes it the most accurate statement among the options.
Throughout the evaluation, the focus is on how duration tools relate to price sensitivity under different features of the bond, and the edge cases where more refined measures (like effective duration) are necessary to reflect embedded options.

Which of the following statements regarding the application of duration is most accurate?

查看解析

登录即可查看完整答案

类似问题

To immunize a portfolio consisting of a single coupon bond against a future liability, an investor should select a bond that:

The duration rule always ________ the value of a bond following a change in its yield

The duration rule always ________ the value of a bond following a change in its yield

Duration measures:

Which of these is a reasonable approximation of bond sensitivity using duration?

If the Duration is 20 and the present value of the bond $4000, then if the rates go up 10%, then you will approximately

Consider a bond with maturity 3 years, par value $1000, and annual coupon rate 8%. If its yield to maturity is 5%, its duration, expressed in years, is equal to

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单