CFA Practice Question

There are 266 practice questions for this study session.

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.

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
You need to log in first to add your comment.