Understanding Duration and Convexity in Bonds

Very Easy Fixed Income Valuation Duration And Convexity

Duration is a key concept in fixed income valuation that measures the sensitivity of a bond's price to changes in interest rates. It represents the weighted average time to receive the bond's cash flows. Convexity is another essential measure that captures the curvature of the price-yield relationship, indicating how the duration of a bond changes as interest rates change.

Which of the following statements about duration and convexity is NOT true?

A bond with a higher duration will generally have a higher price sensitivity to interest rate changes.

Convexity helps estimate the change in the bond’s price for a large change in interest rates.

All bonds have the same convexity, regardless of their coupon rates.

Hint

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