Sensitivity of Bond Prices

Question 1

Coupon

Answer 1

The smaller the coupon the more the bond’s price will move for a given interest rate change: low coupon bonds are more volatile than high coupon bonds.

Question 2

Redemption Yield

Answer 2

For two bonds with the same coupon it will be the longer dated that is most volatile.
Long (dated) and low (yield) bonds are the most ‘volatile’ or sensitive to price movements.

Question 3

Duration

Answer 3

Duration is not the same as the ‘term to redemption’. Duration reflects the time it would take for the investor to get back his purchase price in present value money (PV), but is ALSO
used as a measure of sensitivity.

Question 4

Modified Duration

Answer 4

The modified duration (MD) of a bond estimates how much a bond’s price will change if there is a change in interest rates/yields; it quantifies the sensitivity of the bond price to
changes in GRY.
Modified Duration = duration/ (1+r)
Modified Duration will tend to:
-Underestimate rises in value
-Overestimate falls in value

Question 5

Change in Bond Price

Answer 5

Change in bond price = - MD x change in GRY x current price