The error from using duration to estimate the new price of a fixed-income security will be less as the amount of convexity increases.

Question

Quizplus · Accepted Answer

Convexity measures the curvature in the price-yield relationship of a bond. As convexity increases, the error from using duration alone (a linear approximation) to estimate price changes becomes larger, not smaller, because duration does not account for the curvature.

The Error from Using Duration to Estimate the New Price