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:

Appraisal Rights

The legal right of a company's minority shareholders to have their shares appraised and to receive monetary compensation in the event of certain corporate actions, like mergers.

Dissenting Shareholders

Shareholders who do not agree with certain corporate actions, such as mergers or acquisitions, and are legally entitled to be bought out by the corporation under specific conditions.

Court-Appointed Receiver

A neutral third party appointed by a court to manage and oversee the property or assets that are the subject of litigation, ensuring preservation of their value during the dispute.

Voluntary Liquidation

The process in which a company's directors choose to voluntarily wind up the company's affairs, distribute its assets to creditors, and officially dissolve the business.