Question
At low yield levels, what convexity behavior makes callable bonds risky to analyze with straight-bond intuition?
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Answer
They can exhibit negative convexity.
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Question
Why should you not use modified duration for a bond with embedded options?
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Answer
It ignores cash flow changes from options; use effective duration instead.
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Question
Why is treating a discount rate like an add-on rate a mistake in money markets?
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Answer
They use different denominators, so they produce different yields.
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Question
How does effective duration differ from modified duration in fixed-income analysis?
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Answer
Effective duration is curve-based and accounts for options.
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