- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 7. Yield Curve Factor Models

###
**CFA Practice Question**

Which of the following statement is (are) true with respect to yield curve risk?

II. The effective duration of a portfolio indicates by what percent the portfolio value will change as a result of a change in the yield curve.

III. Key rate duration measures how much the portfolio value will change given a yield change for only one specific maturity.

IV. For a given portfolio, the rate duration will be the same for every maturity along the yield curve.

I. The effective duration of a portfolio is simply the sum of the duration of each of the individual bonds in the portfolio.

II. The effective duration of a portfolio indicates by what percent the portfolio value will change as a result of a change in the yield curve.

III. Key rate duration measures how much the portfolio value will change given a yield change for only one specific maturity.

IV. For a given portfolio, the rate duration will be the same for every maturity along the yield curve.

A. I, II, III and IV

B. III only

C. I and III

**Explanation:**I is not entirely true because the effective duration of a portfolio is the weighted average of the duration of each of the individual bonds, with the weights being equal to the bond's market value as a proportion of total portfolio value.

II is not entirely true either because effective duration of a portfolio indicates by what percent the portfolio value will change as a result of a "parallel" shift in the entire yield curve. A parallel shift would mean that interest rates at all different terms would have to change by the same amount, a rare occurrence indeed.

IV is incorrect because for a given portfolio, the rate duration will be different for every maturity along the yield curve.

###
**User Contributed Comments**
0

You need to log in first to add your comment.