Chapter 3

The Volatility of Bond Prices

It is sometimes erroneously supposed that the volatility of high-grade bond prices in response to a given change in yield is entirely a function of maturity. This is only partly true. There are two other factors which affect volatility importantly: the coupon rate and the general level of yields. All things else being equal, with the same percentage change in yield, the volatility of the price of a bond increases:

1. As maturity lengthens, (the longer the maturity, the greater the price volatility).
2. As coupon rate declines, (the lower the coupon, the greater the price volatility).
3. As yields rise, (the higher the yield level from which a yield fluctuation starts, the greater the price volatility). ...

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