Which of the following statements is correct regarding duration?
A) It is a measure of the average price of a financial instrument.
B) It doesn't take into account the timing and market value of cash flows.
C) It increases if the average coupon increases.
D) It decreases as maturity decreases

Question

Quizplus · Accepted Answer

Duration is a measure of a bond's sensitivity to changes in interest rates, and it decreases as maturity decreases. Option A is incorrect because duration is not a measure of the average price of a financial instrument. Option B is incorrect because duration does take into account the timing and market value of cash flows. Option C is incorrect because if the average coupon increases, the bond's cash flows will be higher and thus the bond's duration will also increase.

Which of the Following Statements Is Correct Regarding Duration