When the investor's investment horizon is less than the Macaulay duration of the bond she owns:
A) the investor is hedged against interest rate risk.
B) reinvestment risk dominates, and the investor is at risk of lower rates.
C) market price risk dominates, and the investor is at risk of higher rates.

Question

Quizplus · Accepted Answer

When the investment horizon is less than the Macaulay duration, market price risk dominates because the bond's price is more sensitive to interest rate changes, and the investor is at risk of higher rates leading to a decrease in the bond's price.

When the Investor's Investment Horizon Is Less Than the Macaulay