Reading 69: Introduction to the Measurement of Interest R statements, effective, following, about, style

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6.Which of the following statements about modified duration and effective duration is FALSE?

A)   Effective duration should be used for bonds with embedded options.

B)   The modified duration measure assumes that yield changes do not change the expected cash flows.

C)   Modified duration should be used for bonds with embedded options.

D)   The effective duration measure recognizes the fact that yield changes may change the expected cash flows.

7.When compared to modified duration, effective duration:

A)   places less weight on recent changes in the bond's ratings.

B)   places more weight on recent changes in the bond's ratings.

C)   is equal to modified duration for callable bonds but not putable bonds.

D)   factors in how embedded options will change expected cash flows.

8.The goal of computing effective duration is to get a:

A)   preliminary estimate of modified duration.

B)   preliminary estimate of Macaulay duration.

C)   more accurate measure of the bond's price sensitivity when embedded options exist.

D)   measure of duration that is effectively constant for the life of the bond.

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答案和详解如下：

6.Which of the following statements about modified duration and effective duration is FALSE?

A)   Effective duration should be used for bonds with embedded options.

B)   The modified duration measure assumes that yield changes do not change the expected cash flows.

C)   Modified duration should be used for bonds with embedded options.

D)   The effective duration measure recognizes the fact that yield changes may change the expected cash flows.

The correct answer was C)

Using modified duration as a measure of the price sensitivity of a security with embedded options to changes in yield would be misleading. With embedded options, yield changes may change the expected cash flows.

7.When compared to modified duration, effective duration:

A)   places less weight on recent changes in the bond's ratings.

B)   places more weight on recent changes in the bond's ratings.

C)   is equal to modified duration for callable bonds but not putable bonds.

D)   factors in how embedded options will change expected cash flows.

The correct answer was D)

The point of effective duration is to consider expected changes in cash flow from features such as embedded options.

8.The goal of computing effective duration is to get a:

A)   preliminary estimate of modified duration.

B)   preliminary estimate of Macaulay duration.

C)   more accurate measure of the bond's price sensitivity when embedded options exist.

D)   measure of duration that is effectively constant for the life of the bond.

The correct answer was C)

The point of effective duration is to consider expected changes in cash flow from features such as embedded options. When embedded options exist, the effective duration will give a better measure of the bond’s price sensitivity to interest rate changes.