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CFA Level I · CFA Level I Exam · Yield-Based Bond Duration Measures and Properties

An investor buys a fixed-rate bond with a Macaulay duration of 6.2 years and plans to hold it for exactly 6.2 years. Which risk is most likely approximately offset at this horizon after a single, immediate, parallel shift in yields?

Interest rate risk is approximately offset when the horizon equals Macaulay duration, because the price effect of a yield change and the reinvestment income effect move in opposite directions and largely cancel, leaving the horizon return close to the original yield to maturity.

  1. ACredit spread risk and liquidity risk
  2. BInterest rate risk, as price risk and reinvestment risk offsetCorrect
  3. CInflation risk, as coupons rise with yields

Explanation

When the investment horizon equals the Macaulay duration, the change in bond price from a yield shift is roughly offset by the change in coupon reinvestment income. This leaves the horizon return close to the original yield to maturity. Credit and inflation risks are not addressed by this matching.

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