Most people are not familiar with bonds. They prefer the excitement of stocks which brings instant judgement over their buy or sell calls rather than wait patiently for years to collect coupon payments. However, there are something that bonds can teach us about stocks. With the recent volatility in the stock market, it is perhaps useful to know what can we learn about stocks from bonds.
 
The price volatility of a bond comes mostly from interest rate changes. However, not all bonds exhibit the same sensitivity to interest rates. There are several factors that affect the interest rate sensitivity of a bond. These are: bond maturity (i.e. how many more years before the bond expires), coupon rate (i.e. how much “dividends” the bond will pay semi-annually) and credit risk (i.e. how likely is the bond issuer able to honour its coupon and principal payments). The longer a …