convexity

noun con·vex·i·ty \ kən-ˈvek-sə-tē , kän- \
Updated on: 13 Oct 2017

Definition of convexity

plural convexities
1 :the quality or state of being convex
2 :a convex surface or part

Examples of convexity in a Sentence

  1. the convexity of the lens

  2. the convexities along the surface

Recent Examples of convexity from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'convexity.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of convexity

1599


Financial Definition of CONVEXITY

convexity

What It Is

In the bond world, convexity refers to the shape of the yield curve and  how sensitive bond prices are to changes in interest rates.

How It Works

The degree to which a bond's price changes when interest rates change is called duration, which often is represented visually by a yield curve. Convexity describes how much a bond's duration changes when interest rates change, meaning that investors can learn a lot not just from the direction of the yield curve but the curviness of the yield curve. Accordingly, convexity helps investors anticipate what will happen to the price of a particular bond if market interest rates change.

Generally, when interest rates fall, bond prices rise. But a bond with negative convexity loses value when interest rates fall. This is often the case for mortgage-backed securities because they rely on underlying mortgage loans, which are typically refinanced (and thus paid off early) when interest rates fall. Prepayment repays the lenders and mortgage-backed security investors off early, leaving them stuck with reinvesting their money at the market's current lower rates. Just the opposite would happen with bonds that have positive convexity.

Why It Matters

Convexity is a price-predicting tool for bonds. It also reveals the interest rate risk of a bond and helps investors consider whether a bond's yield is worth the underlying risk.

Most mortgage bonds are negatively convex, largely because they can be prepaid. An issuer's incentive to call a callable bond at par also increases as interest rates decrease; therefore, the prices of instruments with negative convexity do not rise as quickly as the prices of noncallable bonds, whose convexity is different.


CONVEXITY Defined for English Language Learners

convexity

noun

Definition of convexity for English Language Learners

  • : the quality or state of being curved outward : the quality or state of being convex

  • : a shape that is curved outward : a convex shape



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