The Option Adjusted Duration Will Approach the Duration to Maturity,when

question 100

Multiple Choice

The option adjusted duration will approach the duration to maturity,when

• A) Interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value.
• B) Interest rates are significantly below the coupon rate because the option has very little chance of being called, and the call option will have very little value.
• C) Interest rates are significantly above the coupon rate because the option has a high chance of being called, and the call option will have significant value.
• D) Interest rates are significantly below the coupon rate because the option has a high chance of being called, and the call option will have significant value.
• E) None of the above.

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Definitions:

Present Value

The current value of a future amount of money or stream of cash flows, discounted at a specific interest rate.

Annual Coupon

The yearly interest payment paid to bondholders, usually fixed as a percentage of the bond's face value.

Cash Flow

The net amount of cash being transferred into and out of a business, project, or financial product.

Required Return

The minimum annual percentage earned by an investment that will entice individuals or companies to invest their money.