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.

Convexity
A measure of the curvature in the relationship between bond prices ... 
Negative Convexity
When the shape of a bond's yield curve is concave. A bond's convexity ... 
Bond Yield
The amount of return an investor will realize on a bond. Several ... 
Required Yield
The return a bond must offer in order to be a worthwhile investment. ... 
Interest Rate Risk
The risk that an investment's value will change due to a change ... 
Bond
A debt investment in which an investor loans money to an entity ...

Markets
Explaining Convexity
Convexity is the measure of the curve in the relationship between a bondâ€™s price and its yield. 
Investing
Immunization Inoculates Against Interest Rate Risk
Bigmoney investors can hedge against bond portfolio losses caused by rate fluctuations. 
Markets
Understanding Interest Rates, Inflation And Bonds
Get to know the relationships that determine a bond's price and its payout. 
Markets
Use Duration And Convexity To Measure Bond Risk
Find out how this measure can help fixedincome investors manage their portfolios. 
Markets
Bond Basics: Yield, Price And Other Confusion
Investopedia Explains: Bond yield, Bond price, yield to maturity, the link between price and yield and bond price in the market. 
Markets
Interest Rates, Inflation and the Bond Market
Interest rates, bond prices and inflation all have an impact on one another. 
Markets
The Effect of Fed Fund Rate Hikes on Your Bond Portfolio
Learn how an increase in the federal funds rate may impact a bond portfolio. Read about how investors can use the duration of their portfolio to reduce risk. 
Markets
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment. 
Markets
Understanding Interest Rates Inflation And The Bond Market
Interest rates, bond yields and inflation expectations are all correlated. 
Markets
5 Fixed Income Plays After the Fed Rate Increase
Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.

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?
Read a brief overview of bond duration and bond convexity and why bondholders should take these into consideration when deciding ... Read Answer >> 
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 >>