For large interest rate declines,duration ___________ the increases in the bond's price,and for large interest rate increases,it ____________ the decline in the bond's price.

Question

Quizplus · Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates. For a large interest rate decline, the increase in the bond's price would be greater than what duration predicts, hence duration underpredicts. Similarly, for a large interest rate increase, the decline in the bond's price would be greater than what duration predicts, hence duration overpredicts. Therefore, option A is the correct answer.

For Large Interest Rate Declines,duration ___________ the Increases in the Bond's