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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
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