A Security Might Exhibit Negative Convexity Because

question 42

Multiple Choice

A security might exhibit negative convexity because:

• A) its duration is greater than its maturity.
• B) it has a fixed interest rate below current market rates.
• C) a bank has a negative GAP.
• D) it has embedded options.
• E) markets are not efficient.

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Definitions:

T-Bill

Short for Treasury Bill, this is a short-term government security issued at a discount from par value and pays no interest.

Risk Tolerance

The degree of variability in investment returns that an investor is willing to withstand, related to one's financial situation, investment objectives, and psychological comfort.

Risky Asset

An asset that carries a significant degree of risk of losing value, but also offers a potential for higher returns compared to safer investments.

Risk-Free Asset

An asset which is assumed to provide a guaranteed return with negligible risk of financial loss, often considered to be short-term government securities.