Which bond fund duration is more sensitive to interest rate changes?

Prepare for the CSI Investment Funds in Canada exam with flashcards and multiple choice questions. Gain insights through hints and explanations for a successful exam experience!

Longer-duration bonds are more sensitive to changes in interest rates. Duration measures how much a bond’s price is expected to move for a given change in yields. The basic rule is that the percent price change is roughly equal to minus duration times the yield change. So, with the same rate move, a bond with a longer duration will experience a larger price swing than one with a shorter duration. This happens because the cash flows from a longer-maturity bond are further in the future and more heavily affected by changes in the discount rate, leading to a bigger revaluation when rates shift. Conversely, short-duration bonds have less price movement for the same rate change, and money market funds, with near-zero duration, are least affected. Therefore, the bond fund with longer duration will show greater sensitivity to interest rate changes.