Reading 66: Introduction to the Measurement of Interest Rate border, effective, computing, face

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LOS e Distinguish among the alternative definitions of duration.

The goal of computing effective duration is to get a:

A) preliminary estimate of modified duration.

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

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

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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.