Question

Suppose you are setting a coupon for a callable bond. What is the relationship between coupon level and volatility? Why would required coupon levels change if vol changes in the market. (You can answer in terms of price instead of coupon if you find it easier.)

Answer 1

I would prefer to keep a high coupon rate when I'm looking it in context of volatility.

The relationship between a coupon rate and a bond price volatility is inversely related. The higher the coupon rate, the less volatile the bond prices are to the change in rates of interest and The lower the coupon rate, the more volatile the bond prices are to the change in rates of interest.

Investor generally prefer stable bonds and don't like much volatility so I would select a higher coupon rate that would be less sensitive to change in overall interest rates.