Yield Sensitivity in DeFi: Understanding Interest Rate Risks
Yield sensitivity is a measure of how the price of an fixed income asset change as part of interest rate declines.
What is yield sensitivity?
The yield sensitivity concept is important to the investor. At the moment, it is a measure that determines how much the price of an asset will change due to the rise in interest rate. If the yield sensitivity is high, it is more likely that interest rate rise will lead to falling prices of the asset if interest-rate are increased.
Yield sensitivity can be positive or negative, depending on how a change in interest rate affects the price of a bond.
At the moment, it is usually measured by calculating one percentage point change in price if the bond’s coupon rate has risen by one percentpoint. In this case, a bond that has a face value of $1,000 with a coupon rate at 10% and is currently sold for $1050 should have an interest-sensitivity of 5 percent. This is what it actually means. If interest rate rise by just 1 percent, the value of your bond will fall by 5 percent to $950.
The value of stocks and other fixed-income investment products affect interest rate sensitivities. In order to understand the impact that will occur in the price of stocks and other assets, investors need to be informed of interest rate sensitivities when deciding what securities should be in their portfolios.
Because they are less likely to lose money if the market drops, investors with high interest rate sensitivities prefer investments with less interest rate sensitivity. As a result of the fact that low interest rate is not too important, investors with low Interest Rate Sensitivity prefer investments with high interest rate sensitive – because there are no doubts that an increase in the prevailing rate will affect value of investment.