Interest Rate Risk and Bond Price Volatility

In this section

• Fundamentals of Interest Rate Risk
  Understand why bond prices move when yields change and what makes some bonds more rate-sensitive than others.
  • The Inverse Relationship Between Bond Prices and Yields
    Review why bond prices fall as yields rise and rise as yields fall in fixed income markets.
  • Factors Affecting Interest Rate Risk
    See how maturity, coupon structure, and market conditions influence a bond’s exposure to rate changes.
• Duration as a Measure of Interest Rate Risk
  Learn how duration estimates bond price sensitivity and why different duration measures are used in practice.
  • Macaulay Duration
    Understand Macaulay duration as the weighted average timing of a bond’s cash flows.
  • Modified Duration
    Review modified duration as a practical estimate of bond price sensitivity to yield changes.
  • Effective Duration
    Learn when effective duration is used for bonds with embedded options and changing cash flow timing.
  • Key Duration Relationships
    Compare how maturity, coupon rate, and yield influence the duration of a bond.
    • Duration and Time to Maturity
      See how longer maturities usually increase duration and deepen sensitivity to rate changes.
    • Duration and Coupon Rate
      Review how higher coupon rates tend to shorten duration by returning cash flows sooner.
    • Duration and Yield to Maturity
      Understand how changes in yield to maturity affect duration and bond price responsiveness.
• Convexity and Bond Price Sensitivity
  Study how convexity refines duration-based estimates of bond price changes when yields move.
  • Limitations of Duration
    Learn why duration alone cannot fully capture bond price behavior when yield changes are large or cash flows shift.
  • Calculating Convexity
    Review how convexity is calculated and used to improve bond price sensitivity analysis.
  • Using Convexity to Improve Duration Estimates
    See how convexity adjustments make duration-based price estimates more accurate across larger rate moves.
• Managing Interest Rate Risk
  Compare practical approaches for controlling rate exposure in fixed income portfolios.
  • Immunization Strategies
    Understand how immunization aligns asset duration with liabilities to reduce rate-risk exposure.
  • Duration Matching
    Review duration matching as a portfolio tool for managing changes in interest rates and liability values.
  • Hedging with Interest Rate Derivatives
    See how derivatives can be used to hedge or reshape fixed income exposure to interest rate movements.