When the investor's investment horizon is less than the Macaulay duration of the bond held and...

When the investor's investment horizon is less than the Macaulay duration of the bond held and market yields increase,

A) the investor's horizon yield could increase or decrease depending on whether the positive impact from market price appreciation is larger than the negative impact from coupon reinvestment.

B) None of the other answers are correct.

C) the investor's horizon yield could increase or decrease depending on whether the negative impact from market price depreciation is larger than the positive impact from coupon reinvestment.

D) the investor's horizon yield decreases.

E) the investor's horizon yield increases.

Solutions

Expert Solution

Answer-

A) the investor's horizon yield could increase or decrease depending on whether the positive impact from market price appreciation is larger than the negative impact from coupon reinvestment.

At the point when the investment horizon is not exactly the Macaulay duration of the bond, price risk dominates coupon reinvestment risk. The investor's risk is to higher interest. The duration gap is positive.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Compute the Macaulay duration and modified duration of a 6%, 25-year bond selling at a yield...

Compute the Macaulay duration and modified duration of a 6%, 25-year bond selling at a yield of 9%. Coupon frequency and compounding frequency are assumed to be semiannual.

Duration Gap: A bond manager has an investment horizon of 8 years. She purchases a 15-...

Duration Gap: A bond manager has an investment horizon of 8 years. She purchases a 15- year bond with 6% annual coupon at par. Right after she purchases the bond, interest rates rise. Is this good or bad for the bond manager?

What is the Macaulay duration in years of a 3% coupon bond with 2 years to...

What is the Macaulay duration in years of a 3% coupon bond with 2 years to maturity and a face value of $100? Assume the bond is trading at a yield of 8%, and that the next coupon payment is to be made exactly 6 months from today. Round your answer to 3 decimal places. For example if your answer is 5.5175, then please write down 5.518.

What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years...

What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years to maturity, and a current price of $1,055.40? (Do not round intermediate calculations. Round your answers to 3 decimal places.) (7.410 is not correct of Macaulay )

What is the Macaulay duration of a bond with a coupon of 7 percent, five years...

What is the Macaulay duration of a bond with a coupon of 7 percent, five years to maturity, and a current price of $1,025.30? What is the modified duration? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years...

What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years to maturity, and a current price of $1,055.40? What is the modified duration? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

What is the Macaulay duration of a bond with a coupon of 6.6 percent, seven years...

What is the Macaulay duration of a bond with a coupon of 6.6 percent, seven years to maturity, and a current price of $1,069.40? What is the modified duration? (Do not round intermediate calculations. Round your answers to 3 decimal places.)

Duration of a coupon paying bond is: equal to its maturity. less than a zero coupon...

Duration of a coupon paying bond is: equal to its maturity. less than a zero coupon bond. equal to its number of payments. None of these. equal to the zero coupon bond.

A bond with Macaulay duration of 2.1 years has a yield of 4.88% and makes coupon...

A bond with Macaulay duration of 2.1 years has a yield of 4.88% and makes coupon payments semiannually. If the yield changes to 5.51%, what percentage price change would the duration measure predict? (Round to the nearest 0.001%, drop the % symbol. E.g., if your answer is -5.342%, record it as -5.342.)

What is the Macaulay Duration of a 4.4% annual coupon bond with 3 years to maturity,...

What is the Macaulay Duration of a 4.4% annual coupon bond with 3 years to maturity, $1,000 face value, and yield to maturity of 4.4%? Round to three decimal places. a. 2.865 b. 2.821 c. 2.886 d. 2.875 e. 2.908

Subjects