Yield Sensitivity
| Yield sensitivity is a measure that determines how much the price of a fixed income asset fluctuates as interest rates vary. It is important for investors to understand yield sensitivity because it can help them make decisions about which investments are likely to perform well in different interest rate environments. When interest rates rise, the prices of most fixed income assets fall. This is because investors can get better returns by investing in other assets that pay higher interest rates. The amount by which the price of a fixed income asset falls when interest rates rise is known as its interest rate sensitivity or duration. Yield sensitivity is measured in terms of an asset's duration. The longer the duration of an asset, the more sensitive it is to changes in interest rates. For example, a one-year bond has a duration of one year, so it will lose or gain one percent of its value for every one percent change in interest rates. A ten-year bond has a duration of ten years, so it will lose or gain ten percent of its value for every one percent change in interest rates. Investors can use yield sensitivity to help them make decisions about which investments to hold in different interest rate environments. For example, if interest rates are expected to rise, investors may want to hold assets with shorter durations, such as one-year bonds. On the other hand, if interest rates are expected to fall, investors may want to hold assets with longer durations, such as ten-year bonds. Yield sensitivity can also help investors decide when to buy or sell an asset. For example, if an investor expects interest rates to rise, they may want to sell an asset with a long duration before rates go up. Conversely, if an investor expects interest rates to fall, they may want to buy an asset with a long duration before rates go down. By understanding yield sensitivity, investors can make more informed decisions about which investments to hold and when to buy or sell them. This can help them maximize returns and minimize losses in different interest rate environments. |
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