Interest Rate Risk

[Hanuman]

Why is the interest rate risk of a bond higher if the yield to maturity is lower?

Thanks

[S2000magician]

Take a look at the price vs. yield curve for a straight bond: it’s steeper as lower YTMs, less steep at higher YTMs.

[Hanuman]

@S2000magician

Take a look at the price vs. yield curve for a straight bond: it’s steeper as lower YTMs, less steep at higher YTMs.

Thank you for the reply. Am i correct if I say interest rate risk is sensitivity of Price change of a bond to the change in interest rate and this is also the definition for Duration

[S2000magician]

@Hanuman

@S2000magician

Take a look at the price vs. yield curve for a straight bond: it’s steeper as lower YTMs, less steep at higher YTMs.

Thank you for the reply.

You’re welcome.

@Hanuman

Am i correct if I say interest rate risk is sensitivity of Price change of a bond to the change in interest rate . . .

Yes.

@Hanuman

. . . and this is also the definition for Duration

The percentage change in the bond’s price divided by the change in its YTM is the definition of modified (or effective) duration.