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