Convexity

A measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.

In the example above, Bond A has a higher convexity than Bond B, which means that all else being equal, Bond A will always have a higher price than Bond B as interest rates rise or fall.

As convexity increases, the systemic risk to which the portfolio is exposed increases. As convexity decreases, the exposure to market interest rates decreases and the bond portfolio can be considered hedged. In general, the higher the coupon rate, the lower the convexity (or market risk) of a bond. This is because market rates would have to increase greatly to surpass the coupon on the bond, meaning there is less risk to the investor.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Convexity — Con*vex i*ty, n.; pl. {Convexities}. [L. convexitas: cf. F. convexit[ e].] The state of being convex; the exterior surface of a convex body; roundness. [1913 Webster] A smooth, uniform convexity and rotundity of a globe. Bentley. [1913 Webster] …   The Collaborative International Dictionary of English

  • convexity — [kän vek′sə tē, kənvek′sə tē] n. [L convexitas] 1. the quality or condition of being convex 2. pl. convexities a convex surface, line, etc …   English World dictionary

  • convexity — A measure of the sensitivity of duration to changes in yield levels. Convexity is a measure of the stability or instability of the measured duration over a range of yields. If convexity is low, that is, if the price/yield relationship is close to …   Financial and business terms

  • Convexity — (Roget s Thesaurus) < N PARAG:Convexity >N GRP: N 1 Sgm: N 1 convexity convexity prominence projection swelling gibbosity bilge bulge protuberance protrusion Sgm: N 1 camber camber cahot =>(N. Am.) …   English dictionary for students

  • convexity — (New American Roget s College Thesaurus) Curved like the outside surface of a sphere or circle Nouns 1. (shape) convexity, prominence, projection, swell[ing], bulge, protuberance, protrusion, growth, lump; stud. See rotundity. 2. (convex object)… …   English dictionary for students

  • convexity — iškilumas statusas T sritis fizika atitikmenys: angl. convexity vok. Konvexität, f; Wölbung, f rus. выпуклость, f pranc. convexité, f …   Fizikos terminų žodynas

  • convexity — convex ► ADJECTIVE ▪ having an outline or surface that curves outwards like the exterior of a sphere. Compare with CONCAVE(Cf. ↑concavity). DERIVATIVES convexity noun convexly adverb. ORIGIN Latin convexus vaulted, arched …   English terms dictionary

  • convexity — noun (plural ties) Date: 1599 1. the quality or state of being convex 2. a convex surface or part …   New Collegiate Dictionary

  • convexity — n. [L. convexus, arched outward] (MOLLUSCA: Bivalvia) The degree to which the shell is convex …   Dictionary of invertebrate zoology

  • convexity — /keuhn vek si tee/, n., pl. convexities for 2. 1. the state of being convex. 2. a convex surface or thing. [1590 1600; < L convexitas. See CONVEX, ITY] * * * …   Universalium

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.