Which of the following statements regarding duration is CORRECT?

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Duration is a measure of a bond's sensitivity to changes in interest rates, and it helps in assessing the interest rate risk of a bond portfolio. The correct statement that immunization is used to reduce interest and reinvestment rate risks highlights a key strategy employed in bond portfolio management.

Immunization involves structuring a portfolio so that the duration of the assets matches that of the liabilities, ensuring that changes in interest rates do not adversely affect the portfolio's ability to meet its future obligations. By carefully managing duration, an investor can maintain a stable outcome regardless of fluctuations in interest rates, thus effectively reducing risk.

Understanding immunization is crucial for financial planners, as it allows for better management of liabilities in relation to interest rate movements, mitigating both the risks associated with interest rate changes and reinvestment rate changes. This is particularly relevant for those managing fixed income portfolios or planning for future cash flows that depend on bond investments.

In contrast, the other statements address different aspects of bond characteristics and behaviors related to interest rate changes but do not accurately reflect the fundamental purpose and effectiveness of immunization in managing interest rate risk.