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11 Cards in this Set
- Front
- Back
reinvestment risk and interest rate risk will exactly offset each other at some point in time, and that point in time will be a bond’s duration. |
true
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Duration |
weighted-average amount of time (measured in years) that it takes to collect a bond’s principal and interest payments. Duration for a bond is similar to beta for a stock, in that both duration and beta are volatility measures that are multiplied by the expected change in interest rates (bonds) or the expected market risk premium (stocks) to arrive at an expected change in the market value of the subject bond or the expected risk premium of the subject stock. |
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duration of a zero-coupon bond is equal to its maturity |
true
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duration of a zero-coupon bond will always be greater than the duration of coupon bond of the same maturity |
true
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an increase in market interest rates decreases duration |
true.
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Duration is inversely related to changes in market and coupon interest rates, and it is directly related to changes in maturity |
true
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Convexity |
a measurement that helps to measure the impact of interest rate changes greater than 1%. curvilinear rather than linear. |
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duartion gives us a good idea of price volatility given a 1% change in interest rates, but not a 2% of 3%
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true. convexity measures the impact of interest rate changes greater than 1%
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duration understates the price increase when rates fall and duration overstates the price decrease when rates rise |
true
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Positive convexity is a desirable characteristic to have in bonds |
true
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Negative convexity |
bond declines more in value when interest rates rise than what duration alone would explain.bond will not rise as much in value when interest rates fall than what duration alone would explain.
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