1.Effective duration is more appropriate than modified duration as a measure of a bond's price sensitivity to yield changes when:

A)   the bond has a low coupon rate and a long maturity.

B)   yield curve changes are not parallel.

C)   the bond is a floating rate security.

D)   the bond contains embedded options.

2.Why should effective duration, rather than modified duration, be used when bonds contain embedded options?

A)   Effective duration considers expected changes in cash flows.

B)   Modified duration considers expected changes in cash flows.

C)   Either could be used if the bond has embedded options.

D)   Neither duration method should be used when embedded options are present.

3.Which of the following explains why modified duration should NOT be used for bonds with call options? Modified duration assumes that the cash flows on the bond will:

A)   change with the bond's embedded options.

B)   not change.

C)   be affected by a putable bond.

D)   be affected by a convertible bond.

答案和详解如下：

1.Effective duration is more appropriate than modified duration as a measure of a bond's price sensitivity to yield changes when:

A)   the bond has a low coupon rate and a long maturity.

B)   yield curve changes are not parallel.

C)   the bond is a floating rate security.

D)   the bond contains embedded options.

The correct answer was D)

Effective duration takes into consideration embedded options in the bond. Modified duration does not consider the effect of embedded options. For option-free bonds, modified duration will be similar to effective duration. Both duration measures are based on the value impact of a parallel shift in a flat yield curve.

2.Why should effective duration, rather than modified duration, be used when bonds contain embedded options?

A)   Effective duration considers expected changes in cash flows.

B)   Modified duration considers expected changes in cash flows.

C)   Either could be used if the bond has embedded options.

D)   Neither duration method should be used when embedded options are present.

The correct answer was A)

Modified duration assumes that the cash flows on the bond will not change (i.e., that we are dealing with non-callable bonds). This greatly differs from effective duration, which considers expected changes in cash flows that may occur for bonds with embedded options.

3.Which of the following explains why modified duration should NOT be used for bonds with call options? Modified duration assumes that the cash flows on the bond will:

A)   change with the bond's embedded options.

B)   not change.

C)   be affected by a putable bond.

D)   be affected by a convertible bond.

The correct answer was B)

Modified duration assumes that the cash flows on the bond will not change (i.e., that we are dealing with non-callable bonds). This greatly differs from effective duration, which considers expected changes in cash flows that may occur for bonds with embedded options.