Yield-Based Bond Convexity and Portfolio Properties
2024 Curriculum
CFA Program Level I
Fixed Income
Refresher reading access
Overview
While duration is a linear approximation of the sensitivity of a bond’s price to changes in yield, the true relationship between a bond’s price and its yield-to-maturity is a curved (convex) line. We introduce convexity as a complementary risk measure to improve bond price change estimates based on modified duration alone to account for this non-linear relationship. The convexity adjustment becomes more important when considering larger moves in yield-to-maturity and longer-maturity bonds. These lessons will also show how to estimate duration and convexity for a portfolio of bonds, as well as highlight limitations due to underlying assumptions.
0.75 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.