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.
- 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