Convexity - Financial definition
Financial acronyms
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Concise definition of the term convexity
Convexity is a measure of a bond's sensitivity to interest rate variations. More accurately, it is a metric of the curvature of a bond's price-yield relationship.
Comprehensive definition of the term convexity
A bond's price-yield relationship is not linear, it is convex. Especially for large yield movements, the change in the price of a bond can not be reliably predicted by modified duration alone, but needs to take into account convexity.
Convexity means that, as yields fall, bonds' prices gain value faster and faster. The more convex the curve, the faster bonds' prices rise. On the other side, as yields rise, bonds' prices fall more and more slowly.
Mathematically, convexity is the change in the first derivative (Δp/Δy) for a given change in yield. It is represented as Δ2p / Δy2.
Additional information related to this definition
Definitions of related terms
Bond •