Convexity

Filed Under » ,
Dictionary Says

Definition of 'Convexity'

A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.

Investopedia Says

Investopedia explains 'Convexity'

In the example above, Bond A has a higher convexity than Bond B, which means that all else being equal, Bond A will always have a higher price than Bond B as interest rates rise or fall.

As convexity increases, the systemic risk to which the portfolio is exposed increases. As convexity decreases, the exposure to market interest rates decreases and the bond portfolio can be considered hedged. In general, the higher the coupon rate, the lower the convexity (or market risk) of a bond. This is because market rates would have to increase greatly to surpass the coupon on the bond, meaning there is less risk to the investor.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Bond

    A debt ...
  2. Yield

    The income ...
  3. Negative Convexity

    When the shape ...
  4. Below Par

    A term ...
  5. Discount

    The condition of ...
  6. Par Value

    1. The face ...
  7. Convexity Adjustment

    The change ...
  8. Agency Bond

    A bond issued by ...
  9. Convertible Arbitrage

    An investing ...
  10. Liquidation

    1. When a ...

Articles Of Interest

  1. Advanced Bond Concepts: Convexity

    Take a look at what affects convexity and how investors can use it to compare bonds.
  2. The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  3. Use Duration And Convexity To Measure Bond Risk

    Find out how this measure can help fixed-income investors manage their portfolios.
  4. Savings Bonds For Income And Safety

    Bonds offer undeniable benefits to investors, including safety and tax advantages.
  5. Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  6. Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  7. Where can I buy government bonds?

  8. Can a bond be traded over-the-counter?

  9. Can a bond have a negative yield?

  10. This Is Your Brain On Stocks

    Find out how the human mind can hurt investors' portfolios.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center