7. Interest Rate Risk and the Investment Horizon

j. describe how the term structure of yield volatility affects the interest rate risk of a bond;

## k. describe the relationships among a bond’s holding period return, its duration, and the investment horizon;

What are the two yield volatility risks for default-free bonds? 1. interest rate shifts 2. risk of changes in the volatility of interest rates

What is a duration gap? The duration gap is the difference between the Macaulay duration and the investment horizon.