Duration and Convexity of Bonds

Uploaded by : DreamGains Financials, Posted on : 07 Sep 2016


Duration and Convexity are two metrics used to help investors understand how the price of a bond will be affected by changes in interest rates. How  a bond price responds to changes in interest rates is measured by its duration, and can help investors understand the implications for a bond’s price should interest rates change. The change in bonds duration for a given change in yields can be measured by its convexity.

If rates are expected in increase, consider bonds with shorter durations. These bonds will be less sensitive to a rise in yields and will fall in price less than bonds with higher durations.

If rates are expected to decline, consider bonds with higher durations. As yields decline and bond prices move up, higher duration bonds stand to gain more than their lower duration counter parts.


The term Duration has a special meaning in the context of bonds. It is a measurement of how long, in years, it takes for the bond to be repaid by its internal cash flows. It is important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.

For a Zero-Coupon Bond – Duration is equal to its time to maturity.

For a Vanilla Bond – Duration will always be less than its time to maturity.



Convexity is a measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Convexity is used as a risk-management tool, and helps to measure and manage the amount of market risk to which a portfolio of bonds is exposed.



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