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Interest Rate Risk and Return

2024 Curriculum CFA Program Level I Fixed Income

Overview

Prior lessons on yield measures established that a fixed-income investor’s rate of return will equal a bond’s yield-to-maturity (YTM) under certain assumptions. In these lessons, we explore the sources of return for fixed-income investments and demonstrate investment returns in different scenarios, including the one embedded in the YTM calculations. Prior lessons also established interest rate risk. We show how investment horizon, in relation to a bond’s features, is a key determinant of interest rate risk for investors and how different investors in the same fixed-income invest- ment can have different returns and views on risk. Finally, we introduce Macaulay duration, a weighted-average measure of the time to receipt for a bond’s cash flows, and demonstrate how holding a bond for its Macaulay duration balances reinvestment and price risks.

1 PL Credit

If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.