Bond Price Volatility

We have seen how the bond's duration and convexity affect it's price. A bond with higher duration and convexity will tend to see more significant price changes, especially as yield decreases.

EQUATION FOR BOND PRICE

• Bond price - As the bond price decreases, its duration increases.
• Coupon - As the coupon rate increases, it produces more income early on and hence has a shorter duration.
• Maturity - As the bond maturity increases, its duration increases.
• Yield to Maturity - As the YTM increases, the duration decreases since the present value of distant cash flows is weighted less.
• Sinking Fund - A sinking fund is a scheduled prepayment of the bond before it matures. This lowers a bond's duration because of the extra cash flow in the earlier years.
• Call Provision - A callable bond tends to have a shorter duration, because the principal is potentially repaid earlier at the call date.