You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if:
I. Interest rates increase.
II. Interest rates stay the same.
III. Interest rates fall.

Question

Quizplus · Accepted Answer

When you match the duration of a bond to your investment horizon and continuously adjust to maintain this match, your realized rate of return will be the same as the promised yield on the bond regardless of whether interest rates increase, stay the same, or fall. This strategy immunizes your portfolio against interest rate risk.

You Have an Investment Horizon of 6 Years