[Source:] Arthur Salzer, B.A. Econ. (McMaster University), CFA, CIM

“Remember that longer-term/lower-coupon bonds go down more in price than shorter-term/higher-coupon bonds do when interest rates rise,” he said.

Could someone please explain the quote above? Why's it true?

  • When the coupon is high, any change in interest rate is relatively less important. For example, if you have a 10% coupon and interest rates rise from 0% to 1%, your absolute RoI is still 9%, not a huge change. But if the coupon was only 2%, your RoI got halved
  • With short term bonds, interest rates matter less because you can always hold a bond to maturity, and the return of the principal makes up a much greater part of the value of the bond than the coupon.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy