My brain is probably burnt out by now… can’t get the convexity effect

you know what a parabola is? look at the tangent in point 0, which is the x-axis. if you move to the right or the left, the point on the parabola is above the x-axis. that’s convexity.

The tangent line of the Price-Yield curve is a straight line. In order to get a better estimate of the change in price as a result of the change in yield, you need to add the convexity, which gives you the point on the Price-Yield curve itself, rather than the point on the tangent line.

> you need to add the convexity, which > gives you the point on the Price-Yield curve > itself, rather than the point on the tangent line. well, it’s a better approximation, not the real thing.

Good call… was just trying to paint the picture as clearly as possible.

just think of positive convexity as a good thing. bond price moves up more and down less.

Thanks, guys. All posts were very helpful. I’m just hoping that there aren’t gonna be any detailed Qs… like for putable/callable bonds or specific formulas Good luck to all on Saturday!

I just think of convexity as the curvature that dictates how much value will add to a an option-free bond when the yield decreases; the more convexity, the faster it can appreciate in value (conversely, the more convexity, the slower the bond depreciates should yield increases)

ludwig.wittgenstein Wrote: ------------------------------------------------------- > you know what a parabola is? > This just messes with my head. Wittgenstein asking such a question…Hmm…What we cannot speak about we must pass over in silence.

JoeyDVivre Wrote: ------------------------------------------------------- > ludwig.wittgenstein Wrote: > -------------------------------------------------- > ----- > > you know what a parabola is? > > > > This just messes with my head. Wittgenstein > asking such a question…Hmm…What we cannot speak > about we must pass over in silence. Yep. That’s how it goes