positive convexity

Definition

Property of some bonds that when market interest rates rise their price depreciates at a rate slower than the rate at which their price appreciates when the interest rates fall. On a graph it is seen as a bulging (convex) price/yield curve in which the bond's price at very high and very low yields is greater than the price shown as a straight (tangent) line. All other things being equal, positive convexity increases bond return, therefore investors prefer to hold such bonds. All non-callable (option-free) bonds have positive convexity, and so do most fixed interest rate and maturity date bonds. Putable bonds have greater positive convexity than all other bonds. Mortgage-backed bonds have negative convexity and so do the callable bonds. A pass-through bond can exhibit both positive and negative convexity depending on the current mortgage interest rate compared with the interest rate on the underlying mortgages. Positive convexity and negative convexity, however, are not correct mathematical terms; positive convexity is just convexity, and negative convexity is just concavity.

Use positive convexity in a sentence

There was a lot of positive convexity and things were depreciating at a slower rate, which was good for us.

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You should try to make sure that you are always using positive convexity in the best interests o f your company.

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The positive convexity was witnessed as the interest rates rised but the prices on the bonds did not fall at all.

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