Bond convexity - Definition

In finance convexity is a measure of the sensitivity of the price of a bond to changes in interest rates. It is related to the concept of duration.

Duration is a linear measure of how the price of a bond changes in response to interest rate changes. As interest rates change, the price is not likely to change linearly, but instead it would change over some curved function of interest rates. The more curved the price function of the bond is, the more innacurate duration is as a measure of the interest rate sensitivity.

Convexity is a measure of the curvature of how the price of a bond changes as the interest rate changes. Specifically, duration can be formulated as the first derivative of the price function of the bond with respect to the interest rate in question. Then the convexity would be the second derivative of the price function with respect to the interest rate.

See also

• List of finance topics, bond duration, bond valuation, Black-Scholes_equation.

External link

• Investopedia convexity explanation (http://www.investopedia.com/university/advancedbond/advancedbond6.asp)
• Duration and convexity (http://www.moneymax.co.za/articles/displayarticlewide.asp?ArticleID=271860) Investment Analysts Society of South Africa