Definition of Convexity:
Economics: Situation in which a combination of two or more items is preferable to any one of the individual items. If, for example, someone prefers one slice of bread and half a glass of milk than either a whole bread or a whole glass of milk, he or she has convex preference. Similarly, if it is easier to make a product using two men and two machines than it is using four machines and no men, it is a convex technology.
Before explaining convexity, it's important to know how bond prices and market interest rates relate to one another. As interest rates fall, bond prices rise. Conversely, rising market interest rates lead to falling bond prices. This opposite reaction is because as rates rise, the bond may fall behind in the earnings they may offer a potential investor in comparison to other securities.
Convexity is a measure of the curvature, or the degree of the curve, in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes. Portfolio managers will use convexity as a risk-management tool, to measure and manage the portfolio's exposure to interest rate risk.
Securities: Tendency (sensitivity) of the changes in the price of interest-bearing bonds (and other fixed income securities) to accelerate as the price appreciates. Named after the bulging shape of the yield curve, convexity helps explain the difference between the estimated price of a bond and its market price (which is influenced by fluctuations in interest rates). Positive convexity occurs when durations shorten as interest rates rise, or when durations lengthen as interest rates fall. Negative convexity occurs when durations lengthen as interest rates rise, or when durations shorten as interest rates fall. As a general rule, ten-year Treasury bonds have positive convexity whereas mortgage backed securities have negative convexity.
Mathematics: Characteristic of a set of points in which, for any two points in the set, the points on the curve joining the two points are also in the set.
Synonyms of Convexity
Aduncity, Aquilinity, Arching, Arcuation, Belly, Boss, Bump, Circularity, Colophon, Concameration, Concavity, Convolution, Crookedness, Curvation, Curvature, Curving, Curvity, Cylindricality, Dactylogram, Dactylograph, Decurvation, Decurvature, Dent, Dint, Embossment, Excrescence, Excurvation, Excurvature, Fingerprint, Footmark, Footprint, Footstep, Fossil footprint, Globosity, Globularity, Hookedness, Ichnite, Ichnolite, Impress, Impression, Imprint, Incurvation, Incurvature, Incurvity, Indent, Indentation, Indention, Lump, Orbicularity, Pad, Paw print, Pawmark, Pimple, Print, Pug, Pugmark, Recurvation, Recurvature, Recurvity, Rondure, Rotundity, Rotundness, Roundness, Seal, Sigil, Signet, Sinuosity, Sinuousness, Sphericality, Sphericalness, Sphericity, Spheroidicity, Spheroidity, Stamp, Step, Stud, Thumbmark, Thumbprint, Tortuosity, Tortuousness, Vaulting, Vestige
How to use Convexity in a sentence?
- Convexity demonstrates how the duration of a bond changes as the interest rate changes.
- Convexity is a measure of the curvature in the relationship between bond prices and bond yields.
- If you find that your product is better sold with another similar product you should package them in a form of convexity .
- If a bond's duration increases as yields increase, the bond is said to have negative convexity.
- If a bond's duration rises and yields fall, the bond is said to have positive convexity.
- Some products may just sell better when they are packaged with something else using convexity to make them more marketable.
- Convexity is a risk-management tool, used to measure and manage a portfolio's exposure to market risk.
- The item had a lot of convexity and I knew it would be with us for a long time to come and it would be great for us too.
Meaning of Convexity & Convexity Definition