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Answer: Equivalent to the modified duration of an option-free bond solely under the condition of a perfectly flat yield curve.
Effective duration and effective convexity are the most appropriate measures of interest rate risk for bonds with embedded options. The modified duration and effective duration of an option-free bond are identical only when the yield curve is perfectly flat. This is because the pricing models for complex securities, such as callable and mortgage-backed bonds, include assumptions about issuer behavior, which are not affected by small changes in benchmark rates. Therefore, the correct answer is **C**.
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Effective duration is:
A
A measure of interest rate risk primarily used for bonds with embedded options, though it can also supplement traditional bonds.
B
An estimate of interest rate risk that is most accurate when the assumed change in benchmark rates is minimal.
C
Equivalent to the modified duration of an option-free bond solely under the condition of a perfectly flat yield curve.
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