How Coupon Rates Affect Bond Price Volatility
What Is the Relationship Between Bond Price Volatility and the Coupon Rate?. While bond prices fluctuate as market interest rates change, the volatility of bond price fluctuation depends on the types of bonds as characterized by different maturity terms and coupon rates. The relationship between bond price volatility and the coupon rate is an inverse one -- the higher the coupon rate, the less volatile the bond price is to interest rate change, and vise versa. Bond investors rely on coupon payments as one of the sources to recover their bond investments. Bonds with higher coupon rates pay higher coupon payments, allowing investors to be paid back their initial investment costs sooner in terms of time value of money, and thus subjecting bond prices to interest rate change to a lesser degree.
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