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CFA Level I · CFA Level I Exam · Curve-Based and Empirical Fixed-Income Risk Measures

Yield volatility for a bond is estimated from historical data. Which statement about the term structure of yield volatility is most accurate?

The most accurate statement is that short-term rates are typically more volatile than long-term rates and volatility differs by maturity. This pattern, called the term structure of yield volatility, reflects short rates' sensitivity to monetary policy, whereas long rates move less.

  1. AShort-term rates are typically more volatile than long-term rates, and volatility differs by maturityCorrect
  2. BYield volatility is identical across all maturities on a given curve
  3. CLong-term yields have no volatility because they are anchored by inflation expectations

Explanation

The term structure of yield volatility shows that yield volatility varies by maturity, with short-term rates typically more volatile than long-term rates because they respond to monetary policy. Identical volatility across maturities contradicts this, and long-term yields do vary.

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