Understanding Duration and Price Sensitivity

Medium Fixed Income Valuation Duration And Convexity

In the context of fixed income securities, duration is a critical measure used to assess the sensitivity of a bond's price to changes in interest rates. A bond manager is analyzing two bonds to determine which one presents a greater interest rate risk based on their duration characteristics. Bond X has a duration of 5 years, while Bond Y has a duration of 3 years. Both bonds are similar in terms of coupon rates and maturities.

Considering only the duration of these two bonds, which of the following statements is true?

Bond X will have a greater price change for a given change in interest rates compared to Bond Y.

Bond Y will have a greater price change for a given change in interest rates compared to Bond X.

Both bonds will have an equal price change for a given change in interest rates.

Hint

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