9.20 Price and Reinvestment Rate Risks, Duration, and the Investor’s Horizon: Summary

We can now summarize the points made in the earlier three examples. 

1. If the investor’s horizon and bond’s Duration are the same:

• Coupon reinvestment and price risks exactly offset one another

2. If horizon is less than Duration:

• Market price risk dominates the coupon reinvestment rate risk.
• The investor’s risk is higher interest rates.

3. If the horizon exceeds Duration:

• Coupon reinvestment risks dominates market price risk.
• The investor’s risk is lower interest rates.