Definition of convexity
1 : the quality or state of being convex
2 : a convex surface or part
Examples of convexity in a Sentence
the convexity of the lens
the convexities along the surface
Recent Examples of convexity from the Web
A regime shift in volatility will be best captured with long-convexity exposure combined with tactical shorts rather than tail-risk strategies betting on mean-reverting volatility spikes.
His Convexity Capital Management LP has lost $1 billion of its clients’ money over the past few years as once reliable options trades backfired.
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
Financial Definition of CONVEXITY
What It Is
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
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
Seen and Heard
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