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11 Cards in this Set

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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


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.

duration of a zero-coupon bond is equal to its maturity

true

duration of a zero-coupon bond will always be greater than the duration of


coupon bond of the same maturity

true

an increase in market interest rates decreases duration

true.

Duration is inversely related to


changes in market and coupon interest rates, and it is directly related to changes


in maturity

true

Convexity

a measurement that helps to measure the impact of interest rate changes greater than 1%. curvilinear rather than linear.

duartion gives us a good idea of price volatility given a 1% change in interest rates, but not a 2% of 3%

true. convexity measures the impact of interest rate changes greater than 1%

duration understates the price increase when rates fall and duration overstates the price decrease when rates rise

true

Positive convexity is a desirable


characteristic to have in bonds

true


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.