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CFA Level 1 Question of the Week - Fixed Income

Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 126 Associate
edited March 20 in CFA Practice Questions
When the investment horizon and the bond's Macaulay duration are matched, a parallel shift in the yield curve prior to the first coupon payment will:
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CFA Level 1 Question of the Week - Fixed Income 9 votes

A. increase the investor's return.
22% 2 votes
B. decrease the investor's return.
11% 1 vote
C. minimally affect the investor's horizon return.
66% 6 votes

Comments

  • Matt_AnalystPrepMatt_AnalystPrep MontrealPosts: 126 Associate
    The correct answer is C. 

    When the investment horizon and the bond's Macaulay duration are matched, a parallel shift in the yield curve prior to the first coupon payment will not (or minimally) affect the investor's horizon return. When the investment horizon directly matches the Macaulay duration, the effect of a change in YTM on the sale price of a bond and on the reinvestment income offset each other.
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