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Convexity Question

In the Schweser notes, reading #54, it states that “for two bonds with equal duration, the one with cash flows that are more dispersed over time will have the greater convexity.”

Why is this?

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Approach this problem with convexity’s formula. 

Have you tried modeling a couple of bonds in Excel and played with them?

If not, you should.  You’ll learn a lot more by doing than by reading any drivel here.

Simplify the complicated side; don't complify the simplicated side.

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What kind of drivel???

If the difference between PV+ and PV- widens, then nominator will increase, consequently increasing the convexity.

dasstienn wrote:
What kind of drivel???

If the difference between PV+ and PV- widens, then nominator will increase, consequently increasing the convexity.

Nominator?

Do you mean numerator, or denominator?

And while what you say is true (although, in truth, it has to do with more than simply a widening of that difference), it simply changes his question to, “If the cash flows are more spread out, why does the difference between PV+ and PV− widen?”

In short, not much help, unfortunately.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Yes, but isn’t it much shorter way than creating complex Excel models?

I guess you need to understand only the surface (basics) without going deep into details for the exam. Otherwise you can end up with much complicated staff and eventually choose the wrong answer due to overthinking and nervousness.

P.s. Numerator, I apologise for misspelling.

dasstienn wrote:
Yes, but isn’t it much shorter way than creating complex Excel models?

It’s can be shorter if the explanation’s complete and correct, but not if it isn’t.

And the Excel model’s not complex at all.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thanks S2000. I’ll give that a shot. I know level 1 likely won’t get that far into the weeds with convexity, but I’d like to understand the concept to satisfy my own curiosity.