Deck 10 – Risk & Return

If your investment horizon is longer than a bond's Macaulay duration, which risk dominates realized return?

Reinvestment risk dominates.

If rates rise and you plan to sell a coupon bond soon, what typically happens to realized return?

It falls because price risk dominates.

If rates rise and you have a long investment horizon on a coupon bond, why might realized return improve?

Higher reinvestment income can outweigh the initial price decline.

Why do price risk and reinvestment risk move in opposite directions when yields change?

Higher yields lower price but increase reinvestment income, and vice versa.