Question

Suppose that you use duration to approximate the changes in bond price. When interest rate goes up, the absolute value of duration approximation is ____ than the absolute value of actual bond price changes. When interest rate goes down, the absolute value of duration approximation is ____ than the absolute value of actual bond price changes. A. smaller, larger B. smaller, smaller C. larger, larger D. larger, smaller

Answer 1

Smaller , Larger A

Step-by-step explanation:

When interest rates are changed , the shorter the duration , the less the volatility and the higher the duration , the more the volatility. This explains the reason that duration decrease at a higher rate when interest increases and vice versa.

A slight increases in the interest rate triggers a higher fall in the duration and an slight decrease in the interest rate triggers a higher rise in the duration