negative convexity

negative convexity
A phrase use to describe a particular type of instability in the duration of an instrument. Negative convexity means that as yields rise, duration rises and as yields fall, duration falls. Graphically, this is seen as a price/yield curve for which the price at very low and very high yields is less than the price indicated by a straight, tangent line. For an instrument with negative convexity, duration understates the interest rate sensitivity. If convexity is low, that is, if the price/yield relationship is close to a straight line, duration is stable. If convexity is high, duration is unstable. The greater an instrument's convexity, the less accurate duration will be. Callable bonds, loans, and mortgage-backed bonds typically have negative convexity. American Banker Glossary
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A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. For example, a fixed-rate mortgage may lose value as rates go down because of prepayments. Bloomberg Financial Dictionary

Financial and business terms. 2012.

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