The use of duration to predict changes in bond prices for given changes in interest rate changes will always underestimate the amount of the true price change.

Question

Quizplus · Accepted Answer

Duration is a linear approximation of the relationship between bond price changes and interest rate changes. While it can provide a good estimate for small changes in interest rates, it may not always underestimate the true price change, especially for larger interest rate movements where convexity comes into play, potentially leading to overestimation or underestimation depending on the bond's characteristics.

The Use of Duration to Predict Changes in Bond Prices