'longer-term/lower-coupon bonds' vs 'shorter-term/higher-coupon bonds'
[Source:] Arthur Salzer, B.A. Econ. (McMaster University), CFA, CIM
“Remember that longer-term/lower-coupon bonds go down more in price than shorter-term/higher-coupon bonds do when interest rates rise,” he said.
Could someone please explain the quote above? Why's it true?
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When the coupon is high, any change in interest rate is relatively less important. For example, if you have a 10% coupon and interest rates rise from 0% to 1%, your absolute RoI is still 9%, not a huge change. But if the coupon was only 2%, your RoI got halved
With short term bonds, interest rates matter less because you can always hold a bond to maturity, and the return of the principal makes up a much greater part of the value of the bond than the coupon.
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