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.