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

Question

Quizplus · Accepted Answer

Price risk and reinvestment rate risk are two types of interest rate risk in a bond portfolio. Price risk refers to the potential impact of changes in interest rates on the value of a bond or portfolio of bonds. Reinvestment rate risk arises from the uncertainty about the rate at which future cash flows will be reinvested.

Duration measures the sensitivity of the bond's price to changes in interest rates. The duration of a bond portfolio is the weighted average of the durations of the individual bonds in the portfolio. When the time horizon of the portfolio is equal to its duration, price risk and reinvestment rate risk balance each other out, resulting in no net interest rate risk. Therefore, the correct answer is B.

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