FRM Glossary · Part I · Valuation

Convexity

The second derivative of bond price with respect to yield, scaled by price — captures the curvature that duration alone misses.

In more detail

Price change ≈ −MD × Δy + 0.5 × Convexity × (Δy)². Positive convexity (true for vanilla bonds) means prices rise more from a yield drop than they fall from an equal yield rise. Mortgages and callable bonds exhibit negative convexity at certain yield levels.