Interest rate sensitivity is a critical factor influencing bond valuations. As interest rates rise, the present value of a bond’s future cash flows decreases, leading to a decline in its market price. Conversely, when interest rates fall, bond prices tend to increase.

This inverse relationship is particularly important for investors to consider when constructing and managing fixed-income portfolios. Bonds with longer maturities typically exhibit greater interest rate sensitivity due to the extended period over which their cash flows are discounted. Investors often use measures like duration to quantify a bond’s sensitivity to interest rate changes.

Several macroeconomic factors can influence interest rates, including inflation, economic growth, and monetary policy decisions by central banks. Monitoring these factors and understanding their potential impact on interest rates is essential for making informed investment decisions in the bond market. Furthermore, different types of bonds (e.g., government bonds, corporate bonds) may exhibit varying degrees of interest rate sensitivity depending on their credit quality and other characteristics.