Question

Suppose you were given two bonds, A & B. How do you tell which is more sensative to an interest rate change (price volatility)

Answer 1

The bond which has a higher maturity or a higher coupon is more sensitive to an interest rate change. As the coupon rate increases the sensitivity to interest rate changes is higher because the investors compare the market interest rates to the coupon offered by the bond. Higher the difference greater will be the sensitivity.

Similarly a bond with a higher maturity period will be more volatile because due to higher maturity there is a greater chance of interest rate fluctuations.