Why Does Immunization Against Interest Rate Shocks Using Duration for Fixed-Income

question 4

Multiple Choice

Why does immunization against interest rate shocks using duration for fixed-income securities work?

• A)Because interest rate changes are relatively predictable.
• B)Because the gains or losses on reinvested cash flows that result from an interest rate change are exactly offset by losses or gains from the security when it is sold.
• C)Because the fixed-income security gravitates toward its maturity value as it approaches its maximum duration.
• D)Because cash flows that result from the security are not reinvested so they are not affected by interest rate changes in the same way as the security's gain or loss when it is sold.
• E)It doesn't work because perfect immunization is impossible to accomplish.

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Definitions:

Debriefing

A step at the end of an experiment in which the researcher explains the study’s purpose and design to each participant and undoes any manipulations to participants’ beliefs or state.

Hidden Manipulation

Hidden manipulation involves discreet or covert actions aimed at controlling or influencing others without their conscious awareness.

APA Regulations

Guidelines set by the American Psychological Association concerning ethical practices in psychological research and clinical practice.

U.S. Government

The federal government of the United States, composed of three branches: legislative, executive, and judicial.