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If you need to compute convexity of a fixed-income security what would be desirable or undesirable...

If you need to compute convexity of a fixed-income security what would be desirable or undesirable convexity for an FI? Explain your answer (not more than 100 words).

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Answer #1

Convexity of a Fixed Income Security

A Fixed Income is a type of debt instrument that pays a fixed amount of interest to the investor for a fixed time period. The principal amount will be returned at the end of maturity time to the investor. Some eg of these are bonds, saving bonds, treasury bills,etc

A positive convexity is that if duration rises yield declines. It's a fixed source of income. Bonds with longer maturities are subject to greater price. Price and interest rates are inversely related

Their is always a risk of liquidity and default by the borrower. High yield bonds have more credit risk since default risk is high.

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