Impact of Interest Rate Volatility on Bond Pricing

Medium Term Structure Dynamics Interest Rate Volatility

In the context of fixed income securities, an investor is assessing the impact of interest rate volatility on the pricing of long-term bonds versus short-term bonds. John, a fixed income analyst, notes that in an environment where interest rates are highly volatile, the duration and the sensitivity of bond prices to interest rate changes will differ significantly between bonds of varying maturities.

Which of the following statements correctly describes how interest rate volatility influences the pricing of long-term bonds compared to short-term bonds?

Long-term bonds are less sensitive to changes in interest rate volatility compared to short-term bonds due to their lower duration.

Short-term bonds experience less price change due to interest rate volatility because they have a shorter duration and are thus less impacted by long-term expectations.

Long-term bonds are more sensitive to interest rate volatility compared to short-term bonds because their longer duration exposes them to greater price fluctuations.

Hint

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