Your client wants to know which of his bonds are more volatile to changes in interest rates; what is the best technique to determine volatility of bonds?

Question

Quizplus · Accepted Answer

The best technique to determine volatility of bonds is bond duration. Duration is the average time it takes to capture interest and principal repayments. It seeks to compare bonds with different coupons and maturities by determining how sensitive the price of each bond is to interest rate changes. Bonds exhibit more price volatility the longer the term to maturity. If two bonds have the same coupon, the bond with the greater maturity will have the longer duration. Low coupon bonds are generally more volatile than high coupon bonds. If two bonds have the same maturity, the bond with the lower coupon will have the longer duration. The bond with the longer duration will decline more in price with tan increase in interest rates; the bond with the longer duration will increase more in price with a decrease in interest rates.

Your Client Wants to Know Which of His Bonds Are