Which of the Below Statements Is FALSE

question 21

Multiple Choice

Which of the below statements is FALSE?

• A) The importance of being able to measure the sensitivity of an individual asset, a portfolio of assets, and a liability cannot be overemphasized.
• B) To control interest rate risk, it is necessary to be able to measure it.
• C) An investor with a portfolio of assets wants to be able to measure her exposure to interest rate changes in order to assess whether or not the exposure is acceptable. If it is not, she can alter the exposure.
• D) When a duration is calculated under the assumption that the cash flows do not change when interest rates change, the resulting duration is called effective duration.

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Definitions:

Coupon Payments

Regular interest payments made to bondholders during the lifetime of the bond.

Floating Rate Bonds

Bonds with interest rates that adjust periodically based on a reference rate.

Coupon Rate

The interest rate stated on a bond or other fixed-income security, expressed as a percentage of its face value, that the issuer pays to the bondholder annually.

Interest Rate Risk

The potential loss in value of an investment due to a change in interest rates.