单选题
Reynaldo and Apple are training a new analyst, Norah Spears. They ask
Spears what she knows about duration and convexity. Spears replies with four
statements:
| Statement 1: |
Modified duration is a better measure than effective
duration for bonds with embedded options. |
| Statement 2: |
The convexity adjustment corrects for the error
embedded in the duration. |
| Statement 3: |
Modified duration ignores the negative convexity of a
callable bond. |
| Statement 4: |
Convexity of option-free bonds is always added to
duration to modify the errors in calculating price
volatility. |
Which of the following
regarding Spears' statements is TRUE?
- A. Spears is correct with respect to all four statements.
- B. Spears is correct with respect to Statement 2, but incorrect with respect
to Statement 4.
- C. Spears is correct with respect to Statement 3, but incorrect with respect
to Statement 1.
【正确答案】
C
【答案解析】Effective duration is a better measure than modified duration for bonds with embedded options because modified duration does not explicitly recognize the change in cash flows that will occur in a bond with embedded options as yield changes. Therefore, Statement 1 is incorrect.