Which of the following statements is FALSE?A.The economic meaning of duration is the interest elasticity of a financial asset’s price. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration increases with the maturity of a fixed-income asset at a decreasing rate. D.Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. E.For a given maturity fixed-income asset, duration decreases as the market yield increases.
Question
Which of the following statements is FALSE?A.The economic meaning of duration is the interest elasticity of a financial asset’s price. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration increases with the maturity of a fixed-income asset at a decreasing rate. D.Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. E.For a given maturity fixed-income asset, duration decreases as the market yield increases.
Solution
The correct answer is C. Duration increases with the maturity of a fixed-income asset at a decreasing rate.
Here's a step-by-step explanation:
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Duration is a measure of the sensitivity of the price of a bond or other fixed-income investment to a change in interest rates. It is expressed in years and can be thought of as the "effective maturity" of a bond.
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Statement A is true. Duration is indeed the interest elasticity of a financial asset’s price. It measures how much the price of an asset will change for a given change in interest rates.
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Statement B is also true. The duration of a zero-coupon bond is indeed equal to its maturity. This is because a zero-coupon bond does not make any interest payments before maturity, so all of its cash flows occur at maturity.
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Statement D is true as well. Duration does consider the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.
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Statement E is true. For a given maturity fixed-income asset, duration does decrease as the market yield increases. This is because higher yields mean that future cash flows are discounted more heavily, reducing their present value and thus the duration of the bond.
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Statement C is false. While it is true that duration generally increases with the maturity of a bond, it does not do so at a decreasing rate. In fact, the relationship between duration and maturity is not linear and can vary depending on the bond's coupon rate and yield.
Similar Questions
Which of the following statements is TRUE?A.Duration is the weighted-average time to maturity on the loan using the present values of the cash flows as weights.B.An FI can immunize its portfolio by matching the maturity of its asset with its liabilities. C.The smaller the leverage-adjusted duration gap, the more exposed the FI is to interest rate shocks. D.The larger the numerical value of duration, the more sensitive is the price of that asset or liability to changes or shocks in interest rates.E.Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.
All else being equal, which of the following is true about duration:A bond's duration is higher when the yield is higher.A bond's duration is lower when the yield is higher.Duration is not affected by the size of coupons. Duration is not affected by maturity.
Which of the following statements is false? A. Bonds with shorter maturities, all else being equal, have higher durations. B. A zero coupon bond with a longer maturity is more sensitive to changes in the interest rate than a shorter maturity zero coupon bond. C. Bonds with higher coupon rates, all else being equal, have lower durations. D. The higher the convexity of a bond (in absolute terms) the more inaccurate its duration is as a measure of interest rate sensitivity.
Which of the following is false regarding duration gap analysis?Question 1Answera.Duration gap accounts for bank leverage.b.Duration gap analysis indicates the potential change in a bank’s market value of equity.c.Duration gap accounts for the present value of cash flows associated with all liabilities.d.Duration gap analysis does not classify assets as rate-sensitive.e.Duration gap analysis indicates the potential change in a bank’s net interest income.
Portfolio duration most accurately approximates the sensitivity of the value of a bond portfolio to …Select one:a.Both increases and decreases in the slope of the yield curve.b.Parallel shifts in the yield curve.c.Decreases in the slope of the yield curve.d.Increases in the slope of the yield curve.
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