Bond Convexity

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Second-order sensitivity of bond price to yield changes; corrects the duration approximation for large yield moves.

Details

• category: Fixed Income
• formula: ΔP/P ≈ -MD × Δy + ½ × Convexity × (Δy)²
• formula latex: \dfrac{\Delta P}{P} \approx -\text{MD}\,\Delta y + \tfrac{1}{2}\,\text{Convexity}\,(\Delta y)^2
• related terms: convexity, duration, key-rate-duration

Formula

ΔP/P ≈ -MD × Δy + ½ × Convexity × (Δy)²