Fixed Income - Fixed Income Section 2
- Option : B
- Explanation : A decrease in market interest rates, benefits short term investors more than the long term investors. This is because in the short term, market price risk dominates the reinvestment risk.
- Option : C
- Explanation : In a buy-and-hold strategy if the market interest rates are higher in the future, the returns will increase because the reinvestment income will increase.
- Option : B
- Explanation : Approximate percentage price change = %ΔPVFull ≈ –AnnModDur × ΔYield = -8.50 (- 0.005) = 4.25%
- A
When the investment horizon is greater than the Macaulay duration of a bond, coupon reinvestment risk dominates the market price risk.
- B
When the investment horizon is less than the Macaulay duration of a bond, the investor’s risk is to lower interest rates.
- C
When the investment horizon risk is equal to the Macaulay duration of a bond, the coupon reinvestment risk offsets market price risk.
- Option : B
- Explanation : When the investment horizon is less than the Macaulay duration of a bond, the investor’s risk is to higher interest rates.
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