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 bond's price will always fall by more than it rises by.
- The term refers to the rule that nominal yields can never decline below the zero bound in a convex bond market.
- The bond's price moves in a perfectly straight line against yield, so duration alone fully predicts the price for any move.
- 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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