Which factor typically affects the volatility of a bond's price?

Which factor typically affects the volatility of a bond's price?

• A. The bond's duration
• B. The bond's face value
• C. The bond's issuer
• D. The bond's rating

Answer: (A)

The bond's duration is a key factor that affects the volatility of a bond's price. Duration measures the sensitivity of a bond's price to changes in interest rates. Essentially, the longer the duration, the more sensitive the bond's price will be to fluctuations in interest rates. This heightened sensitivity means that bonds with longer durations typically exhibit greater price volatility compared to bonds with shorter durations when interest rates change. For instance, if interest rates rise, the prices of bonds with longer durations tend to drop more significantly than those with shorter durations. Conversely, when interest rates decline, the price increase for longer-duration bonds can also be more pronounced. Investors use duration as a tool to assess the interest rate risk associated with different bonds, and this understanding is crucial for managing a bond portfolio. The other factors listed can influence certain aspects of bonds, such as credit risk or market perception, but duration directly relates to the bond’s susceptibility to price volatility in response to interest rate changes, making it a fundamental aspect in evaluating bond risk.

The bond's duration is a key factor that affects the volatility of a bond's price. Duration measures the sensitivity of a bond's price to changes in interest rates. Essentially, the longer the duration, the more sensitive the bond's price will be to fluctuations in interest rates. This heightened sensitivity means that bonds with longer durations typically exhibit greater price volatility compared to bonds with shorter durations when interest rates change.

For instance, if interest rates rise, the prices of bonds with longer durations tend to drop more significantly than those with shorter durations. Conversely, when interest rates decline, the price increase for longer-duration bonds can also be more pronounced. Investors use duration as a tool to assess the interest rate risk associated with different bonds, and this understanding is crucial for managing a bond portfolio.

The other factors listed can influence certain aspects of bonds, such as credit risk or market perception, but duration directly relates to the bond’s susceptibility to price volatility in response to interest rate changes, making it a fundamental aspect in evaluating bond risk.