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1. When the investors duration gap is negative: A. Reinvestment risk dominates, and the investor is...

1. When the investors duration gap is negative:

A. Reinvestment risk dominates, and the investor is at risk of lower rates.

B. The investor is hedged against interest rate risk.

C. Market price risk dominates, and the investor is at risk of higher rates.

D. The investor is at risk of both lower rates and higher rates.

Please explain your answer.

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Answer #1

When duration of assets is less compared to the duration of liabilities, that causes the investors duration gap being negative. The duration of assets getting decreased is caused by the interest rates and liabilities are affected by the increase in the interest rates. So when the investor's investment's horizon is more than the duration of bond, reinvestment risk dominates and the investor is risk at running lower rates.

Hence the answer is A.Reinvestment risk dominates, and the investor is at risk of lower rates.

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