About Lesson
a. In order to understand the investment horizon, we need to understand a new term i.e. the duration gap.
b. The duration gap is the difference between Macaulay’s Duration and the Investment Horizon.
c. So, we have two interpretations for the duration gap:
i. If the duration gap is less than 0, the coupon reinvestment risk dominates the market price risk. Thus, the risk is to lower interest rates.
ii. If, however, the duration gap is greater than 0, the market price risk dominates the coupon reinvestment risk. The risk here is to higher the rates.