Question

What makes some bonds have higher convexity than others?How are duration and convexity related?

What makes some bonds have higher convexity than others?How are duration and convexity related?

Homework Answers

Answer #1

Bond convexity :

The relationship between the price and yield of the bond is measured in terms of a non -- linear curve (convex curve). The bond price and the yield are inversely related ; if yield increases the price decreases. Convexity also measures how the duration changes with a change in yield of the bond.

  zero coupon bonds have the highest convexity showing its prices most sensitive to changes in yield. The price of bond changes drastically with a very small change in interest rate because of its high convexity. Usually a bond with high convexity is chosen for investment purposes.

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