Convexity
Certified Financial Planner glossary · Certified Financial Planner
Definition
The second-order sensitivity of bond price to yield change; the curvature that duration alone omits.
Convexity in plain English
Two bonds share the same duration, yet one gains more when yields fall and loses less when yields rise. Convexity names that second-order sensitivity of price to yield change, the curvature a first-order duration estimate leaves out. Positive convexity is usually welcome on option-free bonds; callable structures can show negative convexity across parts of the yield curve. When a stem says duration cannot explain the whole price move, bring convexity into the answer.
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