Fixed income: Effective Convexity (FRM T4-37)

Effective convexity approximates modified convexity (just as effective duration approximates modified duration). Mathematically, convexity is a function of the bond's second derivative with respect to yield: convexity = 1/P*∂^2P/∂y^2. Convexity is illustrated by the curvature (i.e., non-linear) nature of the bond's price/yield relationship.

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