Liquidity Traps Are Most Likely to Occur When The

question 112

Multiple Choice

Liquidity traps are most likely to occur when the:

• A) economy is going through a recovery.
• B) economy is expanding rapidly.
• C) public expects inflation.
• D) public expects deflation.

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, often expressed in years.

Par Value

The face value of a bond or the stock value stated in the corporate charter, often used in reference to bonds.

Immunization

A strategy used in fixed income to shield a portfolio from interest rate fluctuations by aligning the durations of assets and liabilities.

Duration Matching

Duration matching is an investment strategy used to minimize the interest rate risk by matching the duration of assets and liabilities, ensuring changes affect both sides similarly.