Convexity arises because
A)bonds pay interest semiannually.
B)coupon changes are the opposite sign of interest rate changes.
C)duration is an increasing function of maturity.
D)present values are a nonlinear function of interest rates.
E)duration increases at higher interest rates.

Question

Quizplus · Accepted Answer

Convexity arises because present values are a nonlinear function of interest rates, meaning that the relationship between a bond's price and its yield is not a straight line. As interest rates change, the price of a bond will not change in a proportional manner, but rather will change at an increasing rate due to the convexity of the bond's cash flows.

Convexity Arises Because