A security might exhibit negative convexity because:
A) its duration is greater than its maturity.
B) it has a fixed interest rate below current market rates.
C) a bank has a negative GAP.
D) it has embedded options.
E) markets are not efficient.

Question

Quizplus · Accepted Answer

Negative convexity typically arises from the presence of embedded options in a security. This is because the optionality can cause the security's price to behave differently than a straight bond, resulting in a non-linear relationship between price and yield.

A Security Might Exhibit Negative Convexity Because