Summary
Convexity measures how a bond’s duration changes as interest rates move. It provides a more detailed view of how bond prices may react to larger changes in market yields.
While duration gives a first estimate of interest rate sensitivity, convexity helps refine that estimate.
Why it matters
Bond price changes are not always perfectly linear. Convexity helps investors understand how the relationship between bond prices and interest rates may change when rate movements are larger.
It is especially useful for comparing bonds with different maturities, coupons, and cash flow structures.
How to read it
Higher convexity generally means a bond’s price may benefit more when interest rates fall and may be less negatively affected when rates rise, compared with a bond with lower convexity.
However, convexity should not be viewed in isolation. Investors should consider it alongside duration, yield, maturity, and credit risk.