Because of convexity of the price/yield curve of fixed-interest securities,when interest rates _______,duration will _______ the change in price.
A) fall; overestimate
B) fall; underestimate
C) rise; underestimate
D) rise; not affect

Question

Quizplus · Accepted Answer

When interest rates fall, fixed-income security prices rise and duration underestimates the change in price. The inverse is also true, when interest rates rise, fixed-income security prices fall and duration underestimates the change in price. This is because of the convexity of the price/yield curve.

Because of Convexity of the Price/yield Curve of Fixed-Interest Securities,when