Glossary: FI Module 12 — Convexity and Portfolio Duration

Term	Definition
Convexity	A measure of the curvature of the price-yield relationship; second-order sensitivity to yield changes
Approximate convexity	Numerical estimate: $(P V_{-} + P V_{+} - 2 \times P V_{0}) / (Δ y^{2} \times P V_{0})$
Money convexity	Convexity × full price; used for dollar-based convexity adjustments
Effective convexity	Convexity measure using benchmark curve shifts; appropriate for bonds with embedded options
Positive convexity	The property of option-free bonds where price gains from yield decreases exceed losses from yield increases
Negative convexity	A region where the price-yield curve is concave; callable bonds exhibit this when yields are low
Convexity adjustment	The second-order correction to the duration estimate: $\frac{1}{2} \times Con \times Δ y^{2}$
Portfolio duration	The weighted average of individual bond durations: $D_{p} = \sum w_{i} D_{i}$
Portfolio convexity	The weighted average of individual bond convexities: $C_{p} = \sum w_{i} C_{i}$
Parallel shift	A uniform change in yields across all maturities; the assumption underlying portfolio duration
Cash flow yield	The IRR of a bond portfolio’s aggregate cash flows
Dispersion	The variance of cash flow timing around the Macaulay duration; related to convexity

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