I am not sure why B is not correct --------------------------- Why is convexity a good thing for a bond holder? Because when compared to a low convexity bonds a high convexity bond: A) is usually underpriced. B) is more sensitive to interest rate changes, increasing the potential payoff. C) has better price changes regardless of the direction of the yield change. D) has improved estimation of price changes. Your answer: B was incorrect. The correct answer was C) has better price changes regardless of the direction of the yield change. Relative to a bonds with low convexity, the price of a bond with high convexity will increase more when rates decline and decrease less when rates rise.
cause it’s not more sensitive to price changes, actually when the interest rate rises the price goes down by a smaller amount, in this case the convexity helps in achieving a lower sensibility
Forinopop, Got it. apprecaite for the quick reply. Thanks, Chinni
High positive convexity is good for the bondholder, but what about high negative convexity?
High negative convexity only happens with optionality and it accrues to the benefot of the issuer.