Reading 69: Introduction to the Measurement of Interest R following, black, class, limitation

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1.Which of the following is the most significant limitation of the portfolio duration measure? The assumption of:

A)   a nonparallel shift in the yield curve.

B)   a parallel shift in the yield curve.

C)   a linear approximation of the actual price-yield function.

D)   market values being a better measure than book values.

2.Which of the following is NOT a limitation of the portfolio duration measure?

A)   It is subject to huge swings in value since market values may change over time.

B)   It is only a linear approximation of the actual price-yield function.

C)   It is subject to huge swings in value since book values may change over time.

D)   It assumes that the yield for all maturities changes by the same amount.

3.Which of the following is a limitation of the portfolio duration measure? Portfolio duration only considers:

A)   the market values of the bonds.

B)   the book values of the bonds.

C)   a linear approximation of the actual price-yield function for the portfolio.

D)   a nonparallel shift in the yield curve.

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答案和详解如下：

1.Which of the following is the most significant limitation of the portfolio duration measure? The assumption of:

A)   a nonparallel shift in the yield curve.

B)   a parallel shift in the yield curve.

C)   a linear approximation of the actual price-yield function.

D)   market values being a better measure than book values.

The correct answer was B)

The most significant limitation of portfolio duration is the assumption that the yield for all maturities changes by the same amount (a parallel shift in the yield curve).

2.Which of the following is NOT a limitation of the portfolio duration measure?

A)   It is subject to huge swings in value since market values may change over time.

B)   It is only a linear approximation of the actual price-yield function.

C)   It is subject to huge swings in value since book values may change over time.

D)   It assumes that the yield for all maturities changes by the same amount.

The correct answer was C)

Bond duration is calculated using market values; changes in book values are irrelevant.

3.Which of the following is a limitation of the portfolio duration measure? Portfolio duration only considers:

A)   the market values of the bonds.

B)   the book values of the bonds.

C)   a linear approximation of the actual price-yield function for the portfolio.

D)   a nonparallel shift in the yield curve.

The correct answer was C)

Duration is a linear approximation of a nonlinear function. The use of market values has no direct effect on the inherent limitation of the portfolio duration measure. Book values are not relevant to the calculation of duration. Duration assumes a parallel shift in the yield curve, and this is an additional limitation.