The Relationship Between Price Volatility, Maturity and. Volume of Trade of the Malaysian Bond Market. Rubayah Binti Yakob. Liza Marwati Binti Mohd Yusoff. What is the relationship between bond price volatility and term to maturity? Between bond price volatility and the coupon rate? The longer the term to maturity. The first rule of bond price changes is the inverse relationship between or price sensitivity of a bond investment are the coupon rate and the time to maturity.
The Relation Between Time to Maturity & Bond Price Volatility
For every 1 percent change in interest rates, a bond with five years in bond duration, for example, will change by 5 percent in price. Video of the Day Brought to you by Sapling Brought to you by Sapling Coupon Rates and Rising Interest Rates To preserve and grow the value of a bond portfolio as measured by the market prices of its various bonds, bond investors adjust a bond holdings in accordance with changing interest rates.
- What Is the Relationship Between Bond Price Volatility and the Coupon Rate?
When interest rates are likely to rise, prices of all bonds are expected to fall. Investors should unload bonds that are most volatile with prices falling more than others.
Choose bonds with higher coupon rates in a rising interest rate environment, as bonds with lower coupon rates are more volatile and fall the most in prices. Coupon Rates and Declining Interest Rates When interest rates are likely to decline, prices of all bonds are expected to rise and bond investors should add bonds that are most volatile with prices rising more than others.
The lower the coupon rate, the more volatile the bond's price is.
What Is the Relationship Between Bond Price Volatility and the Coupon Rate? | Pocket Sense
In a declining interest rate environment, bond investors should choose bonds with lower interest rates over bonds with higher interest rates, as bonds with higher interest rates are less volatile and rise less in prices. Time Value of Money Effect The different amounts of coupon payments as determined by coupon rates have a time value of money implication to bond investors.
The concept of time value of money is often figuratively supported by the "bird-in-the-hand" argument. Simply put, a bird in the hand now is worth more than a bird in the hand later. The less the coupon payments, the longer it takes to receive back all investments and the more risk exposure of a bond's price has to interest rate changes.
Bond Price Function The price or market value of an investment bond is based on the rate of interest the bond pays -- called the coupon rate -- compared to the current market yield for similar bonds. If a bond's coupon rate is higher than market rates, the value of the bond will be higher than the face amount to bring the yield an investor earns in line with current rates.
This is called a premium bond.
A discount bond is priced below the face amount, because the bond's coupon rate is lower than current market rates. Bond prices move inversely to interest rate changes. Factors Affecting Price Volatility Two features of bonds affect the price volatility in response to changes in market interest rates. A bond with a lower coupon rate will be more volatile than a bond with a higher coupon rate. Also, longer-term bonds are more volatile than bonds with a shorter time to maturity.
Volatility in this case is the amount a bond's price changes in response to a specific change in interest rates. Bond Duration The mathematical concept of bond duration can be used as a measure of the volatility or risk of a bond. Duration is similar to maturity but is a measure of the cash flow of a bond: