convexity

vantan · July 1st, 2006, 7:09 pm

What make bond price curve convex? Is it because of the compounding of interest rate?Thanks again

johnself11 · July 2nd, 2006, 11:26 am

bond price is a function of 1/r^2...this is the essence of convexity

nujoan · July 5th, 2006, 11:36 pm

Thanks.But could you please kindly be more specific what is 1/r^2? Is that a discount function that we use to discount bond's cash flow to find its bond price?Thanks again

johnself11 · July 8th, 2006, 1:35 am

sorry.... i was just saying that the discount function of cashflows is an inverse of the square of the rate.... as such it moves in favor of the bond owner as rates move.....