Qno 4
If these type of questions come what should be the appropriate ans
Mohit dagaPro
Risk and return
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Is the answer C?
Yes ..but how
This question is from Term Structure of Yield Volatility. The curve is downward sloping.
Short-term yield can be more volatile than long term yield than because the short term rates are affected by the changes in the monetary policy whereas long term rates affected by economic growth and inflationary expectations.
Sir also shared an audio on this, I’ll attach it if I find it.
Refer. Explained by Sanjay sir very nicely.
Please correct me if im wrong
They have written can shorter maturity bond be more volatile then longer maturity
So it can because due to change in the monitary policies it can be more volatile
Option b mai they have wriiten yes because short term bonds are less volatile wala reason which is not absolutely true in this question
The question is talking about the term structure of yield volatility.
You know that Duration of long term bonds is higher than that of short term bonds correct i.e long term bonds are more volatile than short term bonds Correct?
But sometimes what happens is that, due to monetary policy changes of the Govt. ,the %age in short term bonds may be more than the %age in long term bonds.
For eg: If there are some Policy changes of the Govt. in the short term, it may so happen that the ‘r’ i.e interest rate of a short term bond may change more than the ‘r’ of the long term bond. So, the sometimes %age change i.e volatility of short term bonds can be higher than% age change of long term bonds.
See, %age in Bond’s price is composed of 2 things: MD and Interest rate.
MD of a long term bond is obviously higher than a short term bond, however the ‘r’ of a short term bond may change more than a long term bond as a result of which the %age change of short term bonds is more than the %age change in long term bonds.
For eg: Bond A
MD =7 and the interest rate falls by 30 BPS
%age change in Price: 7×0.3=2.1%
Bond B
MD=3 and interest rate falls by 140 BPS
%age change in price= 3×1.4=4.2 %
See, bond B with a shorter MD i.e short term bond has changed more than a long term bond as a result of Higher change in it’s interest rate although the MD of bond A was high. So, long term yields are stable than short term yields.