Macaulay duration is the preferred method of evaluating interest rate risk on mortgage bonds.
Thus, the correct option is C.
The weighted average term to maturity of the cash flows from a bond is known as the Macaulay duration. The present value of each cash flow is divided by the cost to calculate its weight. When using an immunization strategy, portfolio managers commonly employ Macaulay duration.
By multiplying the time period by the periodic coupon payment and dividing the resultant value by 1 plus the periodic yield increased to the time to maturity, the Macaulay duration is determined.
When compared to bonds with shorter durations, bonds with larger durations will carry more risk and, as a result, will experience greater price volatility.
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