Question
Why does matching investment horizon to Macaulay duration immunize a coupon bond?
Tap to flip
Answer
Price risk and reinvestment risk exactly offset.
Tap to flip back
Question
If an investor's horizon is longer than a bond's Macaulay duration, which risk dominates?
Tap to flip
Answer
Reinvestment risk dominates.
Tap to flip back
Question
Why do price risk and reinvestment risk move in opposite directions when yields change?
Tap to flip
Answer
Higher yields lower price but increase reinvestment income, and vice versa.
Tap to flip back
Question
If an investor's horizon is shorter than a bond's Macaulay duration, which risk dominates?
Tap to flip
Answer
Price risk dominates.
Tap to flip back