Convexity

Convexity is the change in duration of a bond per unit change in the price of the bond. Calculation of change in price for change in yield, which is based on duration, works only for small changes in prices. This is because the relationship between bond price and yield is not strictly linear; i.e., the unit change in price of the bond is not proportionate to the unit change in yield. Over large variations in prices, the relationship is curvilinear; i.e., the change in bond price is either less than or more than the change in yield, proportionately. This is measured by a concept called convexity.

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