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Finance
Convexity
A measure of how the duration of a bond changes as interest rates change — it shows the curvature of price sensitivity.
Convexity is the second derivative of price with respect to yield. Positive convexity is good for bondholders — it adds extra return when rates move in their favour. Mortgage-backed securities often have negative convexity.
It's the 'bonus effect' that makes long bonds fall less than expected when rates rise and rise more than expected when rates fall.
Real world: When rates fall sharply, high-convexity bonds gain more price than their duration alone would suggest. This is why some bonds are called "convexity plays" by professional bond traders.
💡 Convexity is the hidden bonus (or penalty) in bond price movements.