Respuesta :
Since the bond price and yield to maturity is convex, we can state that convexity is a better measure for calculating the effect on the bond rates where large fluctuations are noticed in the interest rates.
A bond price refers to the discounted value of the bond that is calculated at present. To calculate the bond price, we need to calculate the discounts on the future money flow.
The bond yield refers to the discount rate calculated upon the future cash flow. It is by this discount that the bond price is calculated.
While looking at the graphs of bond price and bond yield, the term convexity is used to show the curvature of the relation between them.
The bond price and bond yield follow an inversely proportional relation. If the bond price increases, the bond yield decreases. Similarly, if bond price decreases, bond yield increases.
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