Yield Sensitivity

What Is Yield Sensitivity?

Yield sensitivity is a measure of how sensitive the yield on an investment is to changes in interest rates. It measures the degree to which a bond’s price will move when there are changes in market interest rates. Generally, bonds with higher yields are more sensitive to rate fluctuations than those with lower yields. This means that if interest rates rise, prices for high-yielding bonds will fall more sharply than those of low-yielding bonds. Conversely, if interest rates decline, prices for high-yielding bonds will increase more quickly than those of low-yielding bonds.

The yield sensitivity of a bond can be calculated by taking its duration and multiplying it by its convexity. Duration measures the expected change in price given a one percent change in yield while convexity measures the curvature or nonlinear relationship between bond prices and yields over time. The greater the duration and/or convexity values, the higher the yield sensitivity of a particular bond; conversely, lower values indicate less sensitivity to changing market conditions. Investors should consider both factors when evaluating potential investments as they can help determine how much risk they may be exposed to due to fluctuating markets conditions over time.

See also  On-Ledger Currency

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