Question：
A long-term bond investor with an investment horizon of 8 years invests in option-free, fixed-rate bonds with a Macaulay duration of 10.5. The investor most likely currently has a:
A. positive duration gap and is currently exposed to the risk of lower interest rates.
B. negative duration gap and is currently exposed to the risk of higher interest rates.
C. positive duration gap and is currently exposed to the risk of higher interest rates.
Answer = C
The duration gap is the bond's Macaulay duration minus the investment horizon, which is positive in this case. A positive duration gap implies that the investor is currently exposed to the risk of higher interest rates.
CFA Level I
"Understanding Fixed-Income Risk and Return", James F. Adams and Donald J. Smith
Section 4.2
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