Sensitivity to interest rate changes
Duration is a measure of the sensitivity of a bond’s price to changes in interest rates. Bonds with longer durations have higher price volatility when interest rates move, meaning that their prices will change more than bonds with shorter durations. Additionally, other factors such as creditworthiness and liquidity can impact price changes when interest rates change; for instance, bonds issued by lower-rated companies are generally more sensitive to rate movements than those issued by higher-rated ones. Furthermore, bonds that trade less frequently (low liquidity) may be more volatile than those with greater market depth (high liquidity).