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Convexity vs yield

Why portfolios with higher convexity are most often characterized by lower yields?

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Are you aware of the relationship between convexity and YTM?

How about the relationship between duration and YTM?

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

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Is it because of the equation:

Convexity=(Macaulay duration2+Macaulay duration+Dispersion)/(1+Cash flow yield)2

yield has inverse relationship with convexity?

Two ways I think about it (assuming all other things constant):

With higher convexity, I would probably pay a higher price to hold the bond. Which means lower yields.

With higher yields, it would take a much higher interest rate change to effect price which means lower convexity.

Why should I pay a higher price to hold the bond with higher convexity?

lizihengtotti wrote:
Why should I pay a higher price to hold the bond with higher convexity?

Greater price increase when interest rates fall, less price decrease when interest rates rise (assuming equal duration).

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/