What risk does Mac Duration primarily address?

Mac Duration primarily addresses interest rate risk. It measures the sensitivity of a bond's price to changes in interest rates. Specifically, Mac Duration quantifies how much the price of a bond is expected to change when interest rates change by 1%. A higher Mac Duration indicates that the bond is more sensitive to interest rate changes, suggesting greater exposure to interest rate risk.

Understanding Mac Duration is crucial for fixed income investors because it allows them to estimate the potential price fluctuations of their bond portfolios in response to shifts in interest rates. As interest rates rise, the price of bonds typically falls, and vice versa. Thus, Mac Duration serves as an essential tool for managing and hedging interest rate risk within a bond portfolio.

While other types of risks, such as credit risk or liquidity risk, affect the bond market, they are not addressed directly by Mac Duration. The concept is specifically tailored to evaluate the effects of interest rate changes on bond valuations.