If bonds are identical except for maturity, the one with the shortest maturity will exhibit the least price volatility. This is because a bond’s price is determined by discounting the value of the cash flows. A shorter-term bond pays its cash flows earlier than a longer-term bond, and near-term cash flows are not discounted as heavily. Another way to think about this: The relationship between maturity and price volatility (all else equal) is direct – a greater maturity results in greater price volatility. |
