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Why can reinvestment risk dominate price risk?
Higher rates reduce the current value of the bond, but they also increase the rate earned on future coupon reinvestment. If the investor's horizon is long, the reinvested coupons may compound for enough periods to offset or exceed the initial price loss. This is why Macaulay duration matters for horizon analysis. Around Macaulay duration, the two effects can approximately offset for small parallel yield shifts. For horizons longer than Macaulay duration, reinvestment effects can become the dominant force.
How does investment horizon change duration risk?
The horizon determines whether price risk or reinvestment risk has more time to affect realized return. If the investor sells before Macaulay duration, the immediate price change usually matters more. If the investor holds longer than Macaulay duration, coupon reinvestment can become more important. So rising rates are not always purely bad for a bond investor. They reduce the bond's current price, but they also allow coupons to be reinvested at higher rates. A long enough horizon gives that reinvestment benefit more time to compound.
What does Macaulay duration measure?
Macaulay duration measures the present-value-weighted average time to receive a bond's promised cash flows. It is not necessarily an actual payment date. It is an average timing measure. For a coupon bond, some value arrives before maturity through coupons, so Macaulay duration is usually shorter than maturity. For a zero-coupon bond, all value arrives at maturity, so Macaulay duration equals maturity.
What words in a CFA fixed-income stem tell me which duration measure to use?
Look for the rate source and the cash-flow assumption. - "Bond's yield" plus fixed cash flows points toward modified duration. - "Benchmark curve shifts up and down" points toward effective duration. - "Callable," "putable," or changing expected cash
Why do some CFA explanations add key rate durations together?
Adding key rate durations can approximate total sensitivity to a parallel curve move when the key-rate grid captures the relevant exposure and every node shifts by the same small amount. Suppose a portfolio has key rate durations of 0.9 , 2.4 , 3.1 ,
When can modified duration and effective duration be close to each other?
They can be close for an option-free fixed-rate bond when cash flows are fixed, the rate move is small, and the effective-duration model is using a parallel benchmark shift that is economically similar to the bond's yield change. The important word i
How is key rate duration different from effective duration?
Effective duration measures price sensitivity to a benchmark curve shift, usually framed as an up-and-down move in the curve used by the valuation model. Key rate duration breaks that curve exposure into maturity nodes. Use effective duration when th
Why is the null hypothesis usually the no-change statement instead of the claim I want to prove?
The null is the claim that remains in place unless the sample evidence is strong enough to reject it. That is why it usually states equality, no change, no difference, or no effect. The alternative is the claim that needs evidence. If an analyst says
Are the p-value method and critical-value method supposed to give the same conclusion?
They are two decision routes for the same hypothesis test. If the significance level, tail direction, and test statistic are consistent, both routes should lead to the same reject or do-not-reject conclusion. For a right-tailed test at the 5 percent
When should I use a t-test instead of a z-test for a one-mean CFA question?
Use a t-test when the population standard deviation is unknown and the prompt uses the sample standard deviation to estimate the standard error. That is the common exam setup because real analysts usually do not know the true population standard devi
How do I know whether a CFA hypothesis testing question needs a formula or just interpretation?
Start by classifying the evidence in the prompt. If the question gives sample data plus a standard error or sample standard deviation, it probably wants a test statistic. If it gives a p-value and a significance level, the decision is already availab
When should I add convexity to a duration price-change estimate?
Add convexity when the prompt gives convexity and asks for a better price-change estimate, or when the yield change is large enough that a straight-line duration approximation is likely too rough. The structure is: Estimated percentage price change =
What is the difference between clean price and full price?
Clean price is the quoted price excluding accrued interest. Full price, sometimes called dirty price, is the settlement price including accrued interest. Use: Full price = clean price + accrued interest Example: a semiannual bond pays a 4% annual cou
Why do I mix up bond price, yield, and duration formulas?
They all use the same underlying bond, but they answer different questions. - Price asks: what is the present value of the cash flows? - Yield asks: what discount rate makes the price equal the present value of cash flows? - Duration asks: how sensit
How do I choose the right fixed-income formula on CFA questions?
Start with the task word. If the prompt asks for value, discount the bond's cash flows. If it asks for yield, solve the discount rate implied by price. If it asks for settlement or full price, add accrued interest to clean price. If it asks for appro
Can a client pay a bonus to an employed analyst?
The analyst should not accept the bonus without written consent from the employer and the relevant parties. The arrangement can create a conflict because the analyst may favor that client, alter recommendations, or allocate attention in a way the emp
When does outside compensation need written consent?
If the outside compensation could create a conflict with the employer's interest, the analyst should obtain written consent from all parties involved before accepting it. A personal performance bonus from a client is a classic additional-compensation
Can an analyst prepare to leave an employer?
Preparation is not automatically a violation. An analyst can usually make general preparations on personal time, such as forming a business entity, renting office space, or drafting plans based on public information. The line is crossed when the anal
How do I distinguish Standard IV(A) from Standard IV(B)?
Look for the trigger. Standard IV(A) is usually about conduct that harms the employer, such as competing while still employed, soliciting clients before resignation, taking confidential information, or using employer resources for a side business. St
Is a separate call option on a bond the same as a callable bond?
No. A callable bond has the call feature inside the bond contract, and the issuer owns that right. The bondholder is exposed to being redeemed when rates fall. A separate call option on a bond is a derivative position. If the investor buys that optio
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