Regarding bond pricing, which type of coupon bond is more volatile in price?

Lower coupon bonds are more volatile in price compared to higher coupon bonds or zero-coupon bonds. The primary reason for this volatility is tied to the relationship between interest rates and bond pricing.

When interest rates fluctuate, bonds react differently depending on their coupon structure. Lower coupon bonds typically have a lower cash flow coming from interest payments, which means that a larger proportion of their total return comes from the final principal repayment. This characteristic makes them more sensitive to interest rate changes, resulting in greater price swings. If interest rates rise, the lower cash flows from these bonds become less attractive compared to newly issued bonds that offer higher rates, causing their prices to drop significantly.

In contrast, higher coupon bonds provide more frequent and substantial cash flows, which buffer their price sensitivity to interest rate movements. This leads to lower overall volatility due to the higher present-value contribution from ongoing coupon payments. Zero-coupon bonds lack coupon payments altogether, and their pricing depends entirely on the time value of money related to the interest rate environment, but their sensitivity is more predictable and is driven mainly by the time until maturity.

Corporate bonds' volatility as a category can vary based on credit risk but doesn’t inherently indicate price volatility relative to coupon structure. Hence, lower coupon bonds stand out as