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CFA Level I · CFA Level I Exam · Interest Rate Risk and Return

Which statement about the Macaulay duration of a bond relative to an investor's horizon is most accurate?

When Macaulay duration equals the investment horizon, the price effect and reinvestment effect of a parallel yield shift offset. Shorter duration leaves reinvestment risk dominant, and longer duration leaves price risk dominant.

  1. AMacaulay duration equal to the horizon makes reinvestment risk and price risk offsetCorrect
  2. BMacaulay duration below the horizon leaves the investor mainly exposed to price risk
  3. CMacaulay duration above the horizon leaves the investor mainly exposed to reinvestment risk

Explanation

Equality of Macaulay duration and horizon offsets the two risks for a parallel shift. Duration below the horizon leaves reinvestment risk dominant, and above leaves price risk dominant, so the other options reverse these.

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