What is a 'Convexity Adjustment'
A convexity adjustment is the change required to be made to a forward interest rate or yield to get the expected future interest rate or yield. Convexity adjustment refers to the difference between the forward interest rate and the future interest rate; this difference has to be added to the former to arrive at the latter. The need for this adjustment arises because of the nonliner relationship between bond prices and yields.
BREAKING DOWN 'Convexity Adjustment'
An adjustment for convexity is often necessary when pricing bonds, interest rate swaps and other derivatives. This adjustment is required because of the unsymmetrical change in the price of a bond in relation to changes in interest rates or yields. In other words, the percentage increase in the price of a bond for a defined decrease in rates or yields, is always more than the decline in the bond price for the same increase in rates or yields. A number of factors influence the convexity of a bond, including its coupon rate, duration, maturity and current price.

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You currently are holding a portfolio of bonds. Interest rates are expected to increase ...
The correct answer is c. Bonds with high convexity are less affected by changes in interest rates than bonds with lower convexity. ... Read Answer >> 
What is the correlation between a coupon rate and the convexity of a given bond?
Read about the relationship between the coupon rate of a bond, its yield and its convexity, and why zerocoupon bonds tend ... Read Answer >> 
How is convexity used in risk management?
Learn how convexity is used for risk management for bond portfolios, and understand the difference between duration and convexity ... Read Answer >> 
How do I use the principles of convexity to compare bonds?
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How can I calculate convexity in Excel?
Learn how to approximate the effective convexity of a bond using Microsoft Excel using a modified and simpler version of ... Read Answer >> 
How can I calculate convexity in MATLAB?
Learn about convexity of the bonds and how to calculate it in MATLAB with function "bndconvy" after specifying necessary ... Read Answer >>