Page 30 - FINAL CFA II SLIDES JUNE 2019 DAY 9
P. 30

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.
   25   26   27   28   29   30   31   32   33   34   35