Which one of the following is the preferred method of evaluating interest rate risk on mortgage bonds?

Question

Quizplus · Accepted Answer

Effective duration is the preferred method of evaluating interest rate risk on mortgage bonds as it takes into account the expected changes in prepayment rates. PSA rating only considers the prepayment rates, while modified duration and Macaulay duration are not appropriate for mortgage bonds as they assume that cash flows are fixed and do not change with interest rate fluctuations. Postponed duration is not a recognized method of evaluating interest rate risk.

Which One of the Following Is the Preferred Method of Evaluating