- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 46. Understanding Fixed-Income Risk and Return
- Subject 7. Interest Rate Risk and the Investment Horizon
CFA Practice Question
If an investor's investment horizon is longer than the Macaulay duration of a traditional (option-free) coupon bond, ______
A. coupon reinvestment risk will dominate.
B. market risk will dominate.
C. coupon reinvestment risk and market risk will offset each other.
Explanation: The investor's risk is to lower interest rates. The loss from reinvesting coupons at a lower rate would be larger than the gain from selling the bond at a higher price due to a lower rate.
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