BOND CONVEXITY

A bond’s convexity refers to the nature of the price-yield relationship of a bond. Refer to Figure 16.8 on page 589 of your text. Short-term high coupon bonds tend to have low convexity – almost a straight line. In contrast, zero coupon long-term bonds have high convexity.

For an example, please see Table 16A.1, page 621 (reproduced below). The table describes an 8%, 5-year bond selling to yield 6%.