The graph showing the relationship between term to maturity and yield to maturity is Yield Curve. Bonds with different maturity change by different amount due to the change in the shape of yield curve.
As Economic circumstance change, curve shift up or down, either in
Parallel shift
· interest rate change by same no. of basis points for all maturities
Non-parallel shift
· different maturities undergo different changes in yield. Bond with shorter maturity will not be affected to the same extent as the one with longer maturity when interest rise.
· If LT rate rise, bond value rapidly drop due to the compounding effect on distant cash flows.
· Longer-term bond has greater price sensitivity and higher bond duration.
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