What Is Yield Sensitivity?

Yield sensitivity, also known as interest rate sensitivity, gauges how much the price of a fixed income asset fluctuates in response to changes in interest rates.

Get to Know with Yield Sensitivity

Yield sensitivity is crucial for investors as it indicates the extent to which an asset's price will vary due to shifts in interest rates. A higher yield sensitivity suggests that the asset's price is more likely to decrease when interest rates rise.

The sensitivity can be either positive or negative, depending on whether a change in interest rates impacts the bond's price positively or negatively.

Typical Measurement

It's typically measured by assessing the percentage change in price resulting from a one-percentage-point increase in a bond's coupon rate. For instance, consider a bond with a $1,000 face value, a 5% coupon rate, and a current market price of $1,050. In this case, the yield sensitivity would be 5%. This implies that if interest rates were to increase by 1%, the bond's value would decline by 5% to $950.

Making Informed Decisions

Viewing interest rate sensitivity as a characteristic of investment aids investors in making informed decisions about their portfolios. Since interest rates impact the worth of bonds and other fixed-income assets, investors need to understand the sensitivity of their investments to interest rate changes when determining the exposure of these securities in their portfolios.

Conclusion

Investors who are highly sensitive to interest rate hikes usually favor investments with lower interest rate sensitivity to mitigate potential losses if the market turns unfavorably. Conversely, investors less concerned about rising interest rates tend to opt for investments with higher interest rate sensitivity, as they are less worried about the investment's value being negatively impacted by changes in prevailing interest rates.

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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.