Convexity is a desirable feature of bonds because.
A) As interest rates decline, the price of a low convexity bond decreases at a decreasing rate.
B) As interest rates decline, the price of a high convexity bond decreases at an increasing rate.
C) As interest rates decline, the price of a low convexity bond increases at a decreasing rate.
D) As interest rates decline, the price of a high convexity bond increases at an increasing rate.
E) As interest rates decline, the price of a high convexity bond decreases at a decreasing rate.

Question

Quizplus · Accepted Answer

Convexity is a measure of the curvature of the relationship between bond price changes and yield changes. When interest rates decline, the price of a high convexity bond increases at an increasing rate. This means that a bond with higher convexity will experience greater price appreciation as interest rates fall, making it a desirable feature for investors.

Convexity Is a Desirable Feature of Bonds Because