Factors affect bond price sensitivity

Maturity - bond with longer maturity is more sensitive to interest rate movements as more cash flows will be affected over a longer period of time.


Coupon Rate - bond with lower coupon rate is more sensitive to interest rate movement. Zero bond has the greatest interest rate risk

Yield - bond with higher yield is less sensitive to interest rate movement due to the nature of positive convexity

Embedded options -can increase or decrease sensitivity depending on the features of the options

Eixstence of embedded options make future cash flows of the bond harder to predict and thus affect the sensitivity

Callable bond value = value of the straight bond components – value of the ebedded call option

In the formula, negative sign is used because call option is of value to the issuer not the bondholder.

Straight bond has inverse relationship between yield and prices. However, if with call options, investors will be unwilling to pay more than the call price or at least not much more so that call price acts as a ceiling on the callable bond value. When yield fall, the call option becomes more valuable to the issurer up to the ceiling value; When yields rise, the value of a callable bond may not fall as much as that of a similar straight bond

Note:
Interest rate risk of FRN is lower than that of a fixed-coupon bond. Still, it exists due to: fixed coupon until the next reset period( time lag), fixed margin, change in credit quality, or the presence of a cap on the floating rate.