- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 46. Understanding Fixed-Income Risk and Return
- Subject 3. Properties of Bond Duration
CFA Practice Question
Which of the following statements is the LEAST accurate with respect to the various measures of duration?
A. For low levels of yield, the effective duration of a callable bond is the highest among all the measures of duration.
B. Modified duration and Macaulay duration do not take into account the call risk associated with the bond.
C. Effective duration may be used for all sorts of bonds.
Explanation: For low levels of yield, the effective duration of a callable bond is the lowest among all the measures of duration. Effective duration takes into account that the bond may be called anytime, thus producing a shorter measure, whereas the other duration measures assume that the bond will be held to maturity.
User Contributed Comments 2
| User | Comment |
|---|---|
| 111hal111 | Why only at low levels of yield is this the case? |
| Ajboy | The bond is most likely to be called at low levels of interest rate because issuer can call back the bond at low interest level and re-issue the bind at current low interest rate level. |