Negative Convexity: Definition & Examples

Instructions:

Choose an answer and hit 'next'. You will receive your score and answers at the end.

question 1 of 3

The graph of the relationship between interest rate and price of a bond is bowed toward the origin. This is the case of _____.

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1. Which of the following bonds shows negative convexity at low yield?

2. Why does a Mortgage Backed Security have negative convexity?

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About This Quiz & Worksheet

Using this five-question quiz and worksheet will help you assess how much you know about negative convexity, such as bonds that show negative convexity at low yield. The worksheet can be printed with or without an answer key.

Quiz & Worksheet Goals

Your knowledge of the following will be tested during this quiz:

  • When the shape of a bond's yield curve is concave and not convex
  • Bonds that show negative convexity at low yield
  • Reason why a Mortgage Backed Security has negative convexity
  • Concern of bond portfolio managers
  • Relationship between interest rate and price of bonds

Skills Practiced

  • Knowledge application - use your knowledge to answer questions about negative convexity
  • Interpreting information - verify that you can read information about a concern of bond portfolio managers and interpret it correctly
  • Information recall - access the knowledge you've gained regarding the relationship between interest rate and price of bonds

Additional Learning

Learn more about this topic with the lesson titled Negative Convexity: Definition & Examples. Here are examples of what the lesson will review:

  • What convexity is
  • Two popular duration metrics (concept of duration)
  • When Frederick Macaulay created the effective maturity concept
  • Considerations of the investment in bonds
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