Question

TRUE OR FALSE: All else being equal, bond traders would prefer high convexity bonds compared to low convexity bonds

Answer 1

Convexity is based on the concept of duration, measuring the sensitivity of the duration of a bond as earnings change. Convexity is a better measure of interest rate risk, related to the security's duration. Where duration assumes that interest rates and bond prices have a linear relationship, convexity allows for other factors and produces a slope.As convexity increases, the systemic risk to which the portfolio is exposed increases.

more risk = more return

hence, bond traders would prefer high convexity bonds compared to low convexity bonds and hence;

the statement above is true.

ie, all els bieng eaqual, bond traders would prefer high convexity bonds compared to low convexity bonds