Community Forex Questions
Positive and negative convexity
Convexity can be classified into two types: positive and negative.
When a bond's duration increases as its price decreases, this is referred to as positive convexity.
Negative convexity occurs when the duration of a bond increases in tandem with its price.
Traders prefer positive convexity because it indicates that bond prices are less sensitive to changes in interest rates. Negative convexity frequently works against traders because it implies that price fluctuations will be larger if interest rates rise.
When a bond's duration increases as its price decreases, this is referred to as positive convexity.
Negative convexity occurs when the duration of a bond increases in tandem with its price.
Traders prefer positive convexity because it indicates that bond prices are less sensitive to changes in interest rates. Negative convexity frequently works against traders because it implies that price fluctuations will be larger if interest rates rise.
Convexity refers to the relationship between bond prices and interest rates, and it impacts how much bond prices change when interest rates fluctuate.
Positive convexity means that as interest rates decrease, bond prices increase at an accelerating rate. Conversely, when rates rise, bond prices decrease at a slower rate. Bonds with positive convexity, like long-term or callable bonds, become more valuable in a declining rate environment, providing greater price gains.
Negative convexity occurs when bond prices increase at a slower rate as interest rates fall and drop more sharply when rates rise. Mortgage-backed securities (MBS) often exhibit negative convexity because prepayments accelerate when rates decline, reducing future interest payments for investors.
Understanding convexity helps investors manage interest rate risk and optimize bond portfolio performance.
Positive convexity means that as interest rates decrease, bond prices increase at an accelerating rate. Conversely, when rates rise, bond prices decrease at a slower rate. Bonds with positive convexity, like long-term or callable bonds, become more valuable in a declining rate environment, providing greater price gains.
Negative convexity occurs when bond prices increase at a slower rate as interest rates fall and drop more sharply when rates rise. Mortgage-backed securities (MBS) often exhibit negative convexity because prepayments accelerate when rates decline, reducing future interest payments for investors.
Understanding convexity helps investors manage interest rate risk and optimize bond portfolio performance.
Oct 26, 2022 15:45