medium · Debt Capital Markets pricing-yields-curve
Why is the price-yield relationship of a standard non-callable bond described as 'convex'?
- Convexity means that for a given change in yield, the price will always fall more than it will rise.
- The bond's price moves in a straight line relative to yield changes, making duration a perfect predictor of price.
- The term refers to the fact that yields can never fall below zero in a convex market structure.
- As yields fall, the bond's price increases at an accelerating rate; as yields rise, the price decreases at a decelerating rate.
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