Why would the replacement of 10-year Treasuries with high-coupon callable bonds reduce the portfolio's duration?
What will be an ideal response?
The replacement of 10-year Treasuries with high-coupon callable bonds reduces the portfolio's duration because the effective duration for callable bonds can be well below the modified duration. More details are given below on the relationships among duration, modified duration, and effective duration.
Duration is a generic concept that indicates the responsiveness of a bond to a change in interest rates. Modified duration is a duration measure in which the cash flow is not assumed to change when interest rates change. In contrast, effective duration measures the responsiveness of a bond's price taking into account that the expected cash flow will change as interest rates change due to the embedded option. The difference between modified duration and effective duration for a bond with an embedded option can be quite dramatic. For example, a callable bond could
have a modified duration of 5 and an effective duration of 3 . For certain highly leveraged
mortgage-backed securities, the bond could have a modified duration of 7 and an effective duration of 50
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What will be an ideal response?
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A) Data mining B) Mass marketing C) Parallel marketing D) Traditional marketing E) Competitive intelligence
Answer the following statements true (T) or false (F)
1. The chief financial officer, controller, and treasurer are all examples of staff positions. 2. Strategic planning focuses on short term actions while operational planning involves developing long- term strategies. 3. The cost of direct materials cannot easily be traced to the manufactured product, and therefore, it is a component of manufacturing overhead. 4. Direct costs and indirect costs can be easily traced directly to a cost object. 5. The wages of factory janitors are considered to be direct labor costs because they are directly related to the manufacturing process.
Lincoln Company engaged in this transaction: Acquired a long-term investment by issuance of long-term debt. Indicate which section, if any, the above transaction would appear in, or relate to, on a statement of cash flows
A) Investing activities section. B) Operating activities section. C) Schedule of noncash investing and financing transactions. D) Financing activities section.