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**CFA Practice Question**

Duration estimates for option-free bonds are ______.

A. stable only when interest rate shocks are small

B. stable when interest rate shocks are either small or large

C. volatile when interest rate shocks are large

**Explanation:**The straight line that is tangent to the curved line remains the same for small or large yield changes.

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**User Contributed Comments**
14

User |
Comment |
---|---|

jwp2 |
Duration estimates are not stable for large interest rate shocks. |

hrai1 |
how come B is the answer? |

lemec |
Question is not about if duration is accurate but stable. Duration is a linear relationship between price and yield. |

aero |
explanation please |

MGM13 |
See Fabozzi book, pages 260-61. It explains that for option-free bonds, duration estimates don't change very much, regardless of whether or not the rate shock is large or small. This is not the case, however, for bonds with embedded options. |

anricus |
Whats the difference between accurate and stable! Yes its a linear relationship! But we know that the price is more correct for small changes than for large changes. Therefore I don't agree with B. |

MUSK |
Remember it is for option free bonds, when they are option free and any way duration estimate is a slope of a straight line, whether you take small changes or big changes on x-axis the slope remains the same. Good question. |

MUSK |
By the way we are talking about stability of estimates but not the accuracy of duration. |

rkrazib |
good one! |

Kuki |
hmmm...good one..question asks for the STABILITY in values through the range of possible changes in the interest rates. Thats why answer is B. The duration will be stable for all values throughout BECAUSE it is a linear relationship. Accuracy though is another matter altogether.... |

lanhuongnguyen |
duration looks like slope, this is good question |

meeravenk |
Correction Kuki ... it is an inverse relationaship. Good explanation MGM13 |

prtwf |
i still have no idea what stable means or what the question is getting at... plz help |

tweety87 |
i guess stable in terms of the same positive or negative reaction to interest changes |