A. Interest rate risk is the change in value of a fixed income security that occurs as a result of a change in market interest rates. If an investment in a fixed income security pays interest at a rate that is less than the market rate of interest, that investment will be able to be sold only if the price is discounted so that the effective rate is equal to the market rate of interest. The longer the maturity period of the investment, the greater the interest rate risk as there is a longer investment horizon to be affected by the changes (up or down) in interest rates. Therefore, prices of long-term bonds are more sensitive to interest rate changes than short-term bonds. Duration (also called Macaulay Duration) is a weighted average of the period of times until the receipt of both the interest and the principal. Duration is a measure of bond price sensitivity to interest rate changes. The longer a bond's duration, the greater its sensitivity to interest rate changes. The numerator of the duration formula is the present value of future payments discounted at the bond's yield to maturity and weighted by the time until the payments will be received. The longer the intervals until payments are made, the larger the numerator, and the longer the bond's duration. The denominator of the duration formula is the discounted future cash flows that will be received from the bond, discounted at the bond's yield to maturity, and thus is the present value of the bond.

B. Maturity matching is used primarily by financial institutions that hold the majority of their assets in liabilities in financial instruments. Maturity matching is a means of hedging interest rate risk, but it involves more than simply measuring a bond's price sensitivity to changes in interest rates. Since the net worth of a financial institution is equal to its total assets less its total liabilities, if a financial institution can equate the duration of its assets and the duration of its liabilities, the bank can immunize its net worth against fluctuations due to changes in interest rates. This is due to the fact that the total change in value for assets as a result of a change in interest rates will be equivalent to the total change in value for liabilities as a result of the change.

C. Interest rate futures are financial futures contracts on debt securities such as U.S. Treasury securities. They do not measure a bond's sensitivity to changes in interest rates.

D. A forward contract is an over-the-counter agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. It is not a technique for managing interest rate risk based on measuring a bond's price sensitivity to changes in interest rates.