Convexity
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 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. |
Related Definitions
Articles Of Interest
-
The Advantages Of Bonds
Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment. -
Savings Bonds For Income And Safety
Bonds offer undeniable benefits to investors, including safety and tax advantages. -
Use Duration And Convexity To Measure Bond Risk
Find out how this measure can help fixed-income investors manage their portfolios. -
Where can I buy government bonds?
The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase first.Bonds are debt obligations. Federal bonds are issued by the federal ... -
Can a bond be traded over-the-counter?
Bonds can be traded over-the-counter (OTC) and, in fact, the majority of corporate bonds that are issued by private and public corporations are traded OTC rather than on exchanges. Furthermore, ... -
Can a bond have a negative yield?
The return a bond provides to an investor is measured by its yield, which is quoted as a percentage. Current yield is a commonly quoted yield calculation, used to evaluate the return on a bond ... -
Advanced Bond Concepts
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration. -
Bond Basics Tutorial
Investing in bonds - What are they, and do they belong in your portfolio? -
The Basics Of The T-Bill
The U.S. government has two primary methods of raising capital. One is by taxing individuals, businesses, trusts and estates; and the other is by issuing fixed-income securities that are backed ... -
Introduction To Commercial Paper
Commercial paper is a short-term instrument that can be a viable alternative for retail fixed-income investors looking for a better rate of return on their money.

Free Annual Reports