Question

Short-term interest rates are more volatile than long-term rates. Despite this, the rates of return of long-term bonds are more volatile than returns on short-term securities.

How can these two empirical observations be reconciled?

Short answer

Volatility is due to higher sensitivity to interest rate savings

Step-by-step solution

Definition

Volatility is a statistical measure to record the degree of variation of a trading price over time.

Explanation on empirical observations

It is true that when the longer-term bonds have a longer duration, their returns become very volatile due to higher sensitivity to interest rate savings. So it is true that rates of short-term bonds and prices of long-term bonds are volatile.