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What does duration measure for a bond?

  1. A The time to maturity in years only
  2. B The sensitivity of the bond's price to a change in interest rates
  3. C The credit quality of the issuer
  4. D The frequency of coupon payments
Answer

The sensitivity of the bond's price to a change in interest rates

Duration is a weighted average time to receive cash flows and approximates the percentage price change for a 1% change in yield. Longer duration means greater interest rate risk.

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