9-51 The greater is convexity,the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Question

Quizplus · Accepted Answer

Convexity measures how much a bond's price will change with a change in interest rates. The greater the convexity, the more the bond's price will increase when interest rates decrease, and the less it will decrease when rates increase. This means that a portfolio with higher convexity has more protection against rising interest rates than one with lower convexity, and has greater potential gains from declining rates. Therefore, the statement is true.

9-51 the Greater Is Convexity,the More Insurance a Portfolio Manager