If You Drop a Hot Rock into a Pail of Water

question 4

Multiple Choice

If you drop a hot rock into a pail of water, the temperature of the rock and the water change until the two are equal. The rock cools and the water warms. Does this hold true if the hot rock is dropped into the Atlantic Ocean?

• A)no, because the Atlantic Ocean is so much bigger than a pail of water
• B)no, because the Atlantic Ocean also contains dissolved salts
• C)yes, because heat will continue to flow until they have the same temperature
• D)yes, because the Atlantic Ocean actually contains more energy than does the pail of water

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Definitions:

Convexity

A gauge of how changes in interest rates affect the relationship between the price of bonds and their yields, showing alterations in the bond's duration.

Price-yield Curve

A graphical representation that shows the relationship between the yield of a bond and its price, demonstrating how bond prices move inversely to changes in yield.

Rate of Change

A mathematical measure that calculates the percentage change in the value of a variable over a specific period.

Immunization

A strategy in finance to shield a portfolio from interest rate changes by matching the duration of assets and liabilities.