Bond: Convexity and Duration

Convexity:

Convexity is the relationship between the prices of bonds and interest rates. Convexity shows how a bond or portfolio of bonds prices change as interest rates change. In my previous blog post about bonds when interest rates rise bond prices drop and vice-verse. Convexity is a hard concept to understand. Below Is a video that explains convexity more in depth.

 

 

Duration:

Duration is the bonds sensitivity to the number of years that the investor plans to hold it. The longer the bond is held the more of chance that interest rates will affect it. A bond held for 30 years has a higher duration than one held for 5 years. Below is a video that explains bond duration more in depth.

 

 

Bond Convexity and Duration go hand in hand and are important to understand for fixed income risk management.

 

Videos From: http://www.youtube.com/watch?v=yOwRgWhIn_g

http://www.youtube.com/watch?v=9HFLGNaEWl8

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