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

Question

Quizplus · Accepted Answer

Convexity is a measure of the curvature in the relationship between bond prices and bond yields. A bond with higher convexity will see its price increase at an increasing rate as interest rates decline. This is because the bond's duration changes as interest rates change, and a bond with higher convexity will be less affected by interest rate changes, leading to higher price increases when rates fall.

Convexity Is a Desirable Feature of Bonds Because as Interest