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convexity
Posted: July 1st, 2006, 7:09 pm
by vantan
What make bond price curve convex? Is it because of the compounding of interest rate?Thanks again
convexity
Posted: July 2nd, 2006, 11:26 am
by johnself11
bond price is a function of 1/r^2...this is the essence of convexity
convexity
Posted: July 5th, 2006, 11:36 pm
by nujoan
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
convexity
Posted: July 8th, 2006, 1:35 am
by johnself11
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.....