SIE (Securities Industry Essentials) Practice Exam

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When is stability in the value of a debt portfolio greatest?

When the portfolio consists of high-yield bonds
When maturities of the debt securities are long
When maturities of the debt securities are short
During periods of falling interest rates

The correct answer is: When maturities of the debt securities are short

Stability in the value of a debt portfolio refers to the likelihood of the portfolio maintaining its value over time. In this context, "greatest" means the highest degree of stability. Therefore, the answer is C because shorter maturities of debt securities typically result in less volatility in the value of the portfolio compared to longer maturities. Option A, high-yield bonds, may seem attractive due to their potentially higher returns but they also tend to be riskier and more volatile, making them less stable. Option B, longer maturities, may provide higher yields but they also make the portfolio more susceptible to changes in interest rates, which can lead to greater fluctuations in value. Option D, periods of falling interest rates, may seem appealing for a debt portfolio but it is important to remember that interest rates can also rise, causing the value of the portfolio to decrease. Overall, shorter maturities of debt securities provide the most stability in the value of a debt portfolio, making option C the correct answer.