What does it mean for an investor with an investment horizon equal to a bond's Macaulay duration?

When an investor has an investment horizon that matches a bond's Macaulay duration, they are effectively immunized from interest rate risk. This is because Macaulay duration measures the weighted average time until the bond's cash flows are received. When the investment horizon aligns with this duration, any interest rate fluctuations will have an equal impact on the present value of the cash flows, effectively offsetting each other.

In practical terms, if interest rates rise or fall, the investor's total return remains stable relative to the changes in rates, as they will receive the bond's cash flows at the appropriate intervals matching their investment timeline. This immunization strategy protects the investor from the volatility caused by interest rate changes, ensuring that the cash flows meet their needs without the risk of reinvestment at unfavorable rates. Thus, by matching the investment horizon to the Macaulay duration, the investor mitigates the effects of interest rate changes on their investment's value.