1215

Which of the following explains why modified duration should least likely be used for bonds with call options? Modified duration assumes that the cash flows on the bond will:

A) not change.

B) change with the bond's embedded options.

C) be affected by a convertible bond.

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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.