1215

Which of the following statements about modified duration and effective duration is NOT correct?

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.

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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.