In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ________.

Question

Quizplus · Accepted Answer

Price risk and reinvestment rate risk are two types of interest rate risk. Price risk arises from changes in interest rates affecting the prices of fixed-income securities, while reinvestment rate risk arises from changes in interest rates affecting the rates at which cash flows from fixed-income securities can be reinvested. Duration is a measure of a bond portfolio's sensitivity to changes in interest rates, and it reflects both price risk and reinvestment rate risk. Therefore, at a time horizon equal to the duration of the portfolio, price risk and reinvestment rate risk will cancel out, leaving only the return of the portfolio's yield-to-maturity.

In the Context of a Bond Portfolio, Price Risk and Reinvestment