The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Question

Quizplus · Accepted Answer

This statement is true. The greater the convexity of a bond or portfolio of bonds, the more sensitive its price will be to changes in interest rates. If rates increase, the price will fall, but the extent of the price drop will be less for more convex bonds. Conversely, if rates decrease, the price gain will be greater for more convex bonds. Therefore, higher convexity can provide insurance against interest rate risk and potential gains from lower rates.

The Greater Is Convexity, the More Insurance a Portfolio Manager