Why do zero-coupon bond prices tend to be more volatile?

Zero-coupon bonds are unique in that they do not make periodic interest payments; instead, they are issued at a discount to their face value and pay the full face value at maturity. This structure leads to greater price volatility compared to coupon-bearing bonds for a couple of reasons.

Firstly, the entire return on a zero-coupon bond is realized at maturity rather than being distributed over time through interest payments. As a result, all of the bond's value is concentrated in a single cash flow, making it highly sensitive to changes in interest rates. When interest rates rise, the present value of the bond's single future payment decreases more significantly than it would for a bond that pays periodic interest, where part of the total return has already been received.

Secondly, because investors are not receiving interest payments throughout the life of the bond, they are more exposed to interest rate risk. If interest rates fluctuate, the market price of the zero-coupon bond must adjust to account for that change in the anticipated return, leading to larger price movements compared to other bond types that mitigate some of this risk through their coupon payments.

In summary, the lack of periodic interest payments causes the prices of zero-coupon bonds to be more volatile, as their entire value hinges on future payment