Which of the following measures the sensitivity of an asset's price to interest rate movements, expressed as a number of years?
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A. B. C. D.A
The correct answer is A. Duration.
Duration is a measure of the sensitivity of an asset's price to interest rate movements, expressed in years. It is a useful tool for managing interest rate risk in fixed income portfolios. The higher the duration of a fixed income security, the more sensitive its price will be to changes in interest rates. Duration takes into account both the coupon payments and the final principal payment of a bond, and is a weighted average of the timing of these cash flows.
Yield to maturity (B) is the rate of return an investor would earn on a bond if it was held until maturity and all coupon payments were reinvested at the same rate. It does not directly measure interest rate sensitivity.
Convexity (C) is a measure of the curvature of the relationship between a bond's price and its yield. It provides a more precise measure of the interest rate sensitivity of a bond than duration alone.
Immunization (D) is a strategy used to manage interest rate risk by matching the duration of a portfolio of assets to the investor's time horizon. This reduces the impact of interest rate changes on the portfolio's value. Immunization involves constructing a portfolio of assets with a duration that matches the investor's time horizon, so that the portfolio's value is relatively insensitive to changes in interest rates.