Why Do Investors Like Convexity

Convexity is generally considered a desirable trait. Bonds with greater curvature gain more in price when yields fall than they lose when yields rise. For example in Figure 16.6 bonds A and B have the same duration at the initial yield. The plots of their proportional price changes as a function of interest-rate changes are tangent, meaning that their sensitivities to changes in yields at that point are equal. However, bond A is more convex than bond B. It enjoys greater price increases and smaller price decreases when interest rates fluctuate by larger amounts. If interest rates are volatile, this is an attractive asymmetry that increases the expected return on the bond, since bond A will benefit more from rate decreases and suffer less from rate increases. Of course, if convexity is desirable, it will not be available for free: investors will have to pay more and accept lower yields on bonds with greater convexity.

CHAPTER 16 Managing Bond Portfolios

Figure 16.7 Price-yield curve for a callable bond.

Bond price

Bond price

Convex Yield Curve

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Responses

  • Erkki
    Why do investors like convecity?
    2 years ago
  • Jennifer Krueger
    Why convexity is good for investors ?
    2 years ago
  • timothy
    What do bond investors like convexity of the priceyield relationship?
    1 year ago
  • Kane
    Why highly convex bonds are desirable?
    1 year ago
  • kristian
    Why investors prefer high convexity?
    11 months ago
  • mimosa
    What is convexity and why do investrors like it?
    11 months ago
  • Placido
    Why is convexity a desirable trait in bond?
    10 months ago
  • berhane
    Why does convexity matter vanguard?
    7 months ago
  • Germana Conti
    Why is high convexity desirable as interest rates fall?
    5 months ago
  • Mirella
    Why bond with greater convexity?
    4 months ago
  • semere
    Why do investors like convexity when managing bonds?
    4 months ago
  • charley mckenzie
    Do you always want higher convexity?
    3 months ago
  • BIBIANA
    What do bond buyers like "convexity"?
    27 days ago
  • Keeva
    Why is convexity prefered by investors?
    11 days ago

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