Which of the Following Statements About the Limitations of Duration

question 86

Multiple Choice

Which of the following statements about the limitations of duration analysis is incorrect?

• A) It assumes that the term structure of interest rates changes by an equal number of basis points.
• B) It assumes that the yield curve is always upward-sloping.
• C) Duration needs to be regularly recalculated as interest rates change.
• D) The pricing of fixed-interest securities displays convexity.

---

Definitions:

CDS

CDS stands for Credit Default Swap, a financial derivative allowing an investor to "swap" or offset their credit risk with that of another investor.

Coupon Bond

A type of bond that offers interest payments through coupons to the bondholder until its maturity, when the principal amount is reimbursed.

Accrued Interest

The interest that has accumulated on a bond since the last interest payment up to, but not including, the purchase (or sale) settlement date.

Interest Days

The number of days over which interest is calculated on a loan or financial instrument.