Convexity

CFA Level I Glossary

Convexity measures the curvature of the price-yield relationship for a bond. Duration is a linear approximation of price change for a yield move; convexity is the second-order correction that improves the estimate, especially for large yield shifts. For option-free bonds, positive convexity means prices rise more when yields fall than they fall when yields rise by the same amount. Forgetting convexity on large moves is a classic exam miss.

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