Which One of the Following Is the Reason That Macaulay

question 19

Multiple Choice

Which one of the following is the reason that Macaulay duration is NOT a good measure of interest rate risk for mortgage bonds?

• A)Mortgage bonds are long-term securities while Macaulay duration is a short-term measure.
• B)Macaulay duration assumes the debt has a variable rate and most mortgages have a fixed rate.
• C)Macaulay duration requires bond payments to be made semiannually.
• D)Macaulay duration assumes payments are fixed and mortgage bond payments vary.
• E)Macaulay duration only applies to zero coupon bonds.

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Definitions:

Long-Term Liabilities

Obligations of a company that are due beyond one year's time, including bonds payable, long-term loans, and lease obligations.

Consolidated Balance Sheet

A financial statement that presents the assets, liabilities, and equity of a group of companies as if they were a single entity.

Fair Value

An estimate of the price at which an asset or liability would change hands between willing parties, not under duress, in an orderly transaction.

Initial Value Method

An accounting method where investments are recorded at their cost at the time of acquisition without subsequent adjustment for changes in market value.