Yield Sensitivity

November 21, 2023 - Around 2 mins mins to read

Understanding Yield Sensitivity

Yield sensitivity is a crucial concept for investors as it measures how much the price of an asset will change when interest rates fluctuate. A higher yield sensitivity means that the asset’s price is more likely to decrease when interest rates rise.

The impact of interest rate changes on bond prices can result in positive or negative yield sensitivity.

Yield sensitivity is typically measured by calculating the percentage change in price that would occur if a bond’s coupon rate increased by one percentage point. For example, let’s consider a bond with a par value of $1,000, a coupon rate of 5%, and a current selling price of $1,050. In this case, the yield sensitivity would be 5%. This means that if interest rates were to rise by just 1%, the bond’s value would decrease by 5% to $950.

Considering interest rate sensitivity as an investment characteristic can help investors make informed decisions about their portfolios.

Since interest rates affect the value of bonds and other fixed-income investments, investors need to be aware of their sensitivity to interest rate changes when deciding how much exposure to these securities is appropriate for their portfolios.

Investors who are highly sensitive to interest rate increases generally prefer investments with lower interest rate sensitivity. They want to minimize potential losses if the market moves unfavorably. On the other hand, investors who are less concerned about rising interest rates tend to favor investments with higher interest rate sensitivity. They are not overly worried about the negative impact of changing interest rates on the investment’s value.