Economics Risk And Return Questions
Convexity in finance refers to the measure of the curvature of the relationship between bond prices and interest rates. It is a concept used to assess the sensitivity of a bond's price to changes in interest rates. A positive convexity indicates that the bond's price will increase at an increasing rate as interest rates decrease, and decrease at a decreasing rate as interest rates increase. This means that the bond's price is less sensitive to interest rate changes compared to its duration. Conversely, a negative convexity implies that the bond's price will decrease at an increasing rate as interest rates increase, and increase at a decreasing rate as interest rates decrease.