Duration and Convexity

Duration measures a bond's sensitivity to interest rate changes, indicating how much its price will fluctuate with rate moves; a higher duration means greater sensitivity. Convexity describes how this sensitivity itself varies as interest rates change, capturing the curvature of the price-yield relationship. Essentially, while duration provides a linear estimate of price change, convexity accounts for the fact that bond prices are not perfectly linear with interest rate shifts, offering a more accurate prediction. Both concepts help investors understand and manage the interest rate risk associated with bond investments.