Which of the following statements regarding the application of duration is most accurate?

Question

BlackTom AI · Accepted Answer

Let's carefully assess each statement about duration in the context of fixed-income instruments.
Option 1: 'Duration is used to compute an exact price impact from a change in yield.' This is misleading because duration provides a linear approximation of price change for small yield shifts, not an exact price change. For larger yield moves, curvature or convexity matters and improves accuracy. So this statement overstates what duration can deliver.
Option 2: 'Yield curve risk does not impact duration.' In reality, duration is influenced by the structure of cash flows and yield levels; different yield curve scenarios can affect the effective sensitivity of a bond's price. Saying yield curve risk has no impact ignores a key source of risk and the fact that duration can vary with changing discount rates and options in the instrument. Therefore this is incorrect.
Option 3: 'The duration of a zero coupon bond is less than its time to maturity.' For a zero coupon bond, the Macaulay duration equals the time to maturity (and the modified duration is slightly less than that, but not by being less than the time to maturity in the common interpretation). The statement as written asserts a relationship that is not true in the standard duration framework, making it inaccurate.
Option 4: 'Effective duration is useful for bonds with embedded options.' This is correct because effective duration specifically accounts for changes in a bond's cash flows when there are embedded options (like calls or puts) by modeling how the option-adjusted value responds to yield movements, capturing the optioned nature of the cash flows. This makes it the most accurate statement among the options.
Throughout the evaluation, the focus is on how duration tools relate to price sensitivity under different features of the bond, and the edge cases where more refined measures (like effective duration) are necessary to reflect embedded options.

Which of the following statements regarding the application of duration is most accurate? 单项选择题

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