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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. If market yields change by a small amount immediately after purchase, the investor's realized return over the horizon is most likely:

The realized return is approximately equal to the original yield to maturity. When the horizon equals Macaulay duration, the price effect and the reinvestment effect of a small one-time yield change offset each other, so the investor is immunized against the shift.

  1. Aapproximately equal to the bond's original yield to maturityCorrect
  2. Bhigher if yields rise, because the bond price falls
  3. Clower if yields fall, because reinvestment income dominates

Explanation

When the investment horizon equals the Macaulay duration, price risk and reinvestment risk approximately offset for a small, one-time parallel yield shift. The realized horizon return is therefore close to the original yield to maturity. The other options attribute a net gain or loss to one risk alone, ignoring the offset.

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