I Want You
To subscribe to our newsletter

* Required
Please enter a valid email address.
Please enter your first name.
Please check this box if you want to subscribe.
Thank you for subscribing to The Financial Pipeline! You will be receiving an email shortly to confirm your subscription.
Sorry, there was a problem with registration. Please try again.

What is Convexity?

Convexity is an important tool used by investment professionals to show the impact that changes in yield have on the duration of a bond. It’s an especially important consideration during times of volatility on markets.

Convexity is a measure of the amount of “whip” in the bond’s price yield curve and is so named because of the convex shape of the curve. Because of the shape of the price yield curve, for a given change in yield down or up, the gain in price for a drop in yield will be greater than the fall in price due to an equal rise in yields. This slight “upside capture, downside protection” is what convexity accounts for.

Convexity is important as it illustrates the impact that changes in yields have on the duration of the bond. As yields approach zero the duration impact of a movement in yields is accentuated. Large moves in the yield curve can have large nonlinear effects on duration, making convexity an important consideration during volatile markets.

convexity price vs yield graph

convexity-price-vs-yield

3 years ago

Follow us on Twitter to always be financially aware

X

Follow us on Linkedin to always be financially aware

X