Most mortgage bonds are negatively convex.
Callable bonds are negatively convex at lower yields than the yield at which the bond is likely to be called.
One property of a non-callable bond is that as interest rates fall, its price will increase. However, with a callable bond, as interest rates fall, the incentive for the issuer to call the bond at par increases; therefore, its price will not rise as quickly as the price of a non-callable bond.
The price of a callable bond might actually drop as the likelihood that the bond will be called increases. This is why the shape of a callable bond's curve of price with respect to yield is concave or "negatively convex."
Investment dictionary. Academic. 2012.
Look at other dictionaries:
negative convexity — A phrase use to describe a particular type of instability in the duration of an instrument. Negative convexity means that as yields rise, duration rises and as yields fall, duration falls. Graphically, this is seen as a price/yield curve for… … Financial and business terms
Negative convexity — A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. The New York Times Financial Glossary … Financial and business terms
Convexity (finance) — In mathematical finance, convexity refers to non linearities in a financial model. In other words, if the price of an underlying variable changes, the price of an output does not change linearly, but depends on the second derivative (or, loosely… … Wikipedia
Convexity in economics — Economics … Wikipedia
negative duration — (1) The name for a particular relationship between changes in the price of a debt security and changes in prevailing interest rates. When a security has negative duration, its price decreases in response to a decrease in prevailing market rates.… … Financial and business terms
Bond convexity — In finance, convexity is a measure of the sensitivity of the duration of a bond to changes in interest rates, the second derivative of the price of the bond with respect to interest rates (duration is the first derivative). In general, the higher … Wikipedia
Bond duration — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond … Wikipedia
Option-adjusted spread — (OAS) is the flat spread which has to be added to the treasury yield curve in a pricing model (that accounts for embedded options) to discount a security payment to match its market price. OAS is hence model dependent. This concept can be applied … Wikipedia
Option adjusted spread — (OAS) is the flat spread over the treasury yield curve required to discount a security payment to match its market price. This concept can be applied to mortgage backed security (MBS), Options, Bonds and any other interest rate… … Wikipedia
Collateralized mortgage obligation — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond … Wikipedia