Question 3b
Examiners Report
Whilst most candidates knew the techniques of a duration computation, part (b) asked candidates to discuss the usefulness of duration as a measure of risk (sensitivity). On the whole, this part was done less well, with few candidates demonstrating an understanding of duration in terms of bonds and interest rates, and even fewer discussed the limitations of duration, including its inability to deal with convexity and changes in the shape of the yield curve.