Convexity

Convexity is a measure of the curvature in the relationship between a bond's price and its yield, providing a second-order correction to duration in estimating how much a bond's price will change when interest rates move. While duration gives a linear approximation of price sensitivity, convexity accounts for the fact that the price-yield relationship is actually curved—bond prices rise faster when rates fall than they decline when rates rise by the same amount. A bond with higher convexity is more valuable to investors, as it offers greater upside when rates fall and less downside when rates rise. Convexity is a key metric for fixed-income portfolio managers optimising interest rate risk in institutional bond portfolios.