Asset Price Sensitivity to Interest Rate Movements

A

The correct answer to this question is A. Duration.

Duration is a measure of the sensitivity of the price of a fixed-income security, such as a bond or note, to changes in interest rates. It is expressed as a number of years, and is calculated as the weighted average of the present value of the cash flows from the security, with the weights being the proportion of the present value of each cash flow to the total present value of all cash flows.

In other words, duration tells us how long it will take for the security's cash flows to repay the investor's initial investment, taking into account the time value of money and the timing of the cash flows. A higher duration means that the security's price will be more sensitive to changes in interest rates, while a lower duration means that the security's price will be less sensitive to changes in interest rates.

Yield to maturity (B) is the total return anticipated on a bond or other fixed-income security if the investor holds it until it matures, and is calculated by considering the coupon rate, the current market price of the bond, and the face value of the bond.

Convexity (C) is a measure of the curvature of the relationship between bond prices and bond yields. It provides additional information about the sensitivity of bond prices to changes in interest rates beyond what duration provides.

Immunization (D) is a strategy used by investors to minimize the impact of interest rate movements on a portfolio of fixed-income securities. It involves selecting securities with durations that match the investor's time horizon, and adjusting the portfolio over time to maintain a constant duration.