# ECONOMICS (CBSE/UGC NET)

## ECONOMICS

### RISK AND RETURN

 Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Assuming no change in the credit risk of a bond, the presence of an embedded put option:
 A reduces the effective duration of the bond. B increases the effective duration of the bond C does not change the effective duration of the bond D None of the above
Explanation:

Detailed explanation-1: -The higher a bond’s coupon, the shorter its duration, because proportionately more payment is received before final maturity. Because zero coupon bonds make no coupon payments, a zero coupon bond’s duration will be equal to its maturity.

Detailed explanation-2: -Duration to Worst is the duration of a bond computed using the nearest call date or maturity, whichever comes first. Effective convexity is measure of a bond’s convexity which takes into account its embedded options. Effective duration is measure of a bond’s duration which takes into account its embedded options.

Detailed explanation-3: -Effective duration calculates the expected price decline of a bond when interest rates rise by 1%. The value of the effective duration will always be lower than the maturity of the bond.

Detailed explanation-4: -Spread duration is related to spread in the corporate bond in regard to risk free rate. But effective duration which is calulated for amortized securities and bond with embedded option like call option and put option.

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