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

Question

Quizplus · Accepted Answer

Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. However, duration tends to underpredict the increase in a bond's price when interest rates decline significantly because it assumes a linear relationship between bond prices and yield changes, which is not accurate for large movements. Similarly, for large interest rate increases, duration also underpredicts the decline in the bond's price, as the actual relationship is convex rather than linear.

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