medium · Certified Financial Planner Risk Management
The Shore family is concerned about the impact of rising interest rates on their bond portfolio.
The planner explains that while duration provides a linear estimate, 'convexity' means the true price of the bonds will be:
- Always slightly lower than the linear duration estimate.
- Lower when interest rates fall and higher when rates rise.
- Exactly equal to the duration estimate for small rate changes.
- Always slightly higher than the linear duration estimate.
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