Definition
Convexity measures how duration changes as interest rates change. It captures the non-linear relationship between bond prices and yields. Positive convexity means bonds gain more when rates fall than they lose when rates rise by the same amount. Higher convexity is generally desirable.
Example
A bond with high convexity might gain 8% when rates drop 1% but only lose 7% when rates rise 1%, outperforming duration estimates.
FAQ
What is Convexity?
A measure of the curvature in the relationship between bond prices and yields.
Why is Convexity important?
Convexity helps investors evaluate fixed income and make more informed decisions.