In finance, bond convexity is a measure of the non-linear relationship of bond prices to changes in interest rates, and is defined as the second derivative of the price of the bond with respect to interest rates (duration is the first derivative). In general, the higher the duration, the more sensitive the bond price is to the change in interest rates. Bond convexity is one of the most basic and widely used forms of convexity in finance. Convexity was based on the work of Hon-Fei Lai and popularized by Stanley Diller.[1]
- ^ Diller, Stanley (1991), Parametric Analysis of Fixed Income Securities, in Dattatreya, Ravi (ed.) Fixed Income Analytics: State-of-the-Art Debt Analysis and Valuation Modeling, Probus Publishing