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:

Decades

Periods of ten years, used as a measure of time to describe longer trends in history, economics, or demography.

Cyclical Unemployment

This refers to unemployment that occurs due to fluctuations in the economy, often increasing during a recession and decreasing during an economic expansion.

Unemployment Rate

The fraction of the working population that is not employed and is on the lookout for work.

Recovery

The phase of the business cycle in which economic activity picks up and the economy begins to grow after a recession.