Although, Convexity is listed as a 'risk' to bond investors, it is actually a benefit to investors who own bonds. This is because when a bond has high convexity an investor will make more money for a given drop in interest rates, than he or she will lose given the same magnitude increase in interest rates. Thus, more convexity means more potential upside relative to downside for a bond investor, given that yields are equally likely to move
Although, Convexity is listed as a 'risk' to bond investors, it is actually a benefit to investors who own bonds. This is because when a bond has high convexity an investor will make more money for a given drop in interest rates, than he or she will lose given the same magnitude increase in interest rates. Thus, more convexity means more potential upside relative to downside for a bond investor, given that yields are equally likely to move
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Rate the following statement as True of False:
"Although, Convexity is listed as a 'risk' to bond investors, it is actually a benefit to investors who own bonds. This is because when a bond has high convexity an investor will make more money for a given drop in interest rates, than he or she will lose given the same magnitude increase in interest rates. Thus, more convexity means more potential upside relative to downside for a bond investor, given that yields are equally likely to move up or down by the same amount."
True of False?
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