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Portfolio Duration and Convexity

  • Portfolio duration is the weighted sum of durations of individual securities
  • Weight of each security is the value of the security divided by the value of the portfolio
  • Portfolio convexity is calculated in the same way portfolio duration. It is the weighted sum of durations of individual securities.
Negative Convexity
  • Callable bonds exhibit negative convexity when yields fall below certain level
  • At lower yield, there is incentive for the issuer to call the bond
  • Price curve of the bond bends away from the normal curve thereby exhibiting negative convexity





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