 There is an inverse relationship between bonds prices and the bond yields. Also we know that the interest rate changes substantially. Now every rise and fall in the bond prices gives the bond holder an expectation to earn some profit or bear some loss in the days to come. Now the question arises that why do the bond prices reflect to the interest rate fluctuations? In fact, in the competitive market, the bond prices reflect investors' behavior to earn some fair rate of return on their investment while considering the interest rate fluctuations. That is the reason that interest rate fluctuations and the bond prices sensitivity to these changes is significant to the bond holders. So what is interest rate sensitivity? We know that bond prices are sensitive to changes in the market interest rate and that behavior of the bond prices in response to the changes in the interest rate is termed as the interest rate sensitivity. Interest rate sensitivity is of greater concern to the investors because every rise or fall in interest rates affect the bond holder's capital gain or losses. We also know that there is an inverse relationship between the bond prices and the bond yield. Means every rising yield reduces the bond prices and vice versa. Then we know that bond prices is a convex phenomena. This means that decrease in yield impacts bigger on prices than rising yield of equal magnitude. To understand this phenomena, we have an example where the percentage change in price with corresponding change in yield to maturity for four bonds that differ in terms of their coupon rate, initial yield to maturity and time to maturity. Now we see that how change in bond prices as a function of change in YTM. These concepts are also termed as molecules bond pricing relationship. He says that bond prices and yields are inversely related. As yields increase, the bond prices fall and as yield falls, the bond prices rise. Then any increase in a bond's yield to maturity results in a smaller price change than a decrease in yield of equal magnitude. Prices of long term bonds tend to be more sensitive to interest rate changes than prices of short term bond. For this we have a bond B which is of 330 years and it is showing a little steeper than bond A which has maturity of 5 years but the bond is showing a little flat curve. Then we see that interest rate sensitivity generally increases with maturity but less than proportionally as the bond maturity increases. Low coupon bond prices are more sensitive to interest rate changes than high coupon bonds prices. This we see in case of bond C who has a coupon rate of 3% then the coupon rate of 12% borne by the bond B. Then we see that sensitivity of a bond price to a change in its yield is inversely related to YTM at the current price. And this we see with the bond C. There is a phenomena that maturity is a major determinant of interest rate risk but however it alone is insufficient to measure this risk. To understand this, we have an example here for 8% semi-annual coupon bonds at the different YTM's and times to maturity. The shortest term bond falls in value by less than 1% which is the case in the left panel when the term is 1 year and that fall in prices 0.94% only. And then we see that when the rate of interest increases from 8% to 9% the two bonds with longer maturity of 10 years and 20 years fall by 6.5% and over 9%. Then in the left panel of the screen we see we have a zero coupon bond with different YTM's and times to maturity. We see that the bond price falls by greater proportional amount than the prices of the 8% coupon bond. And that we see that for 1 year we see a 0.96% decline. For 20 years we see 9.15% and 17.46% decline in the price. And these declines are much higher than the coupon bond of 8%. So what these give insight about the effective maturity. We see that the time to maturity is not a perfect measure of long or short term nature of the bond because bonds effective maturity is therefore the average of the maturity of all of the cash flows related with the bond. Then price sensitivity falls with the coupon rate as we see. Then a portfolio of coupons basically this is the collection of the coupons attached to a portfolio to be paid attached to a bond and these are paid over the life of the bond. These portfolio of coupons more heavily weight the earlier shorter term maturities. Then price sensitivity falls with YTM. This means that higher yield reduces the present value of all of the bonds cash flows but more for the more distant cash flows. What we can conclude from this discussion. We see that inverse relationship between bond prices and the bonds yield. We see that any increase in the bonds YTM results smaller price change then a decrease of equal magnitude. Long term bonds tend to be more price sensitive then with price sensitivity increases at a decreasing rate. Higher interest rate risk for lower coupon bonds and price sensitivity is inversely related to the bonds yield to maturity.