If a Price Floor of $23 Were Placed on the Market

question 4

Multiple Choice

If a price floor of $23 were placed on the market in the graph shown, which area represents the surplus that is transferred?

• A) B + C + D
• B) B + C
• C) C
• D) B

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Definitions:

Yield to Maturity

The total return anticipated on a bond if the bond is held until it matures, reflecting interest payments and price changes.

Price Yield Curve

A graph that shows the relationship between the yield of bonds and their maturities, illustrating how interest rates affect bond prices.

Convexity

A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes.

Modified Duration

A measure that estimates the price sensitivity of a bond to a one percent change in interest rates, adjusting for the changing yield to maturity.