Why is Macaulay duration important in bond investing?

Macaulay duration is a crucial concept in bond investing as it quantifies the time it takes, in years, for an investor to receive the bond's cash flows, weighted by the present value of those cash flows. This measure is intimately connected to interest rate risk, which refers to the risk that changes in interest rates will affect the value of a bond.

By providing a weighted average time to maturity, Macaulay duration helps investors understand how sensitive a bond's price is to changes in interest rates. A bond with a longer duration will exhibit more price volatility in response to interest rate changes compared to a bond with a shorter duration. This understanding allows investors to gauge their exposure to interest rate risk effectively, enabling them to make more informed decisions about portfolio management and risk mitigation.

In contrast, the other options do not accurately reflect the role of Macaulay duration in bond investing. The measure does not determine borrowing costs or evaluate credit risk, nor is it specific to assessing real estate bonds. Therefore, the indication of interest rate exposure captured by Macaulay duration is essential for bond investors aiming to manage their investments wisely in relation to fluctuating interest rates.