Bond Convexity and Duration | Convexity explained with example | FIN-Ed

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Bond Convexity and Duration | Convexity explained with example | FIN-Ed

In this video, we are going to discuss what the convexity of a bond is and how it affects the interest rate risk of a bond.

We know that duration is a key tool in bond portfolio management. Yet, the duration rule for the impact of interest rates on bond prices is only an approximation. One reason is that the duration assumes that the percentage price change is directly proportional to the change in bond‘s yield. In reality, the price-yield line is not straight, but convex. Hence, convexity refers to the curvature of the price-yield relationship of a bond.

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