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LOS 34.m: Explain the maturity structure of yield READING 34: THE TERM STRUCTURE AND
volatilities and their effect on price volatility. INTEREST RATE DYNAMICS
MODULE 34.5: TERM STRUCTURE THEORY
The term structure of interest rate volatility is the graph of yield volatility versus maturity. It is important because interest rate
volatility drives price volatility in a fixed income portfolio, especially when securities have embedded options, which are especially
sensitive to volatility.
Short-term interest rates are generally more volatile than are long-term rates.
• Short maturity volatility reflects risks regarding monetary policy; and
• Long-maturity volatility linked to uncertainty regarding the real economy and inflation.