Convexity

How much the price-yield line bends rather than runs straight

In detail

Duration approximates the link between rates and price with a straight line, but the real relationship curves. Convexity measures that gap: the higher it is, the more the price gains when rates fall compared with what it loses when they rise. Large rate moves make the difference visible.

Example

On a bond with duration of 7, a 2% rate move can leave the price about 1% away from the straight-line estimate.

Related terms

Duration Interest rate risk Why bond prices fall when rates rise

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