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Negative Convexity

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Negative convexity
A bond characteristic such that the price appreciation will be less than the price depreciation for a large change in yield of a given number of basis points. For example, a fixed-rate mortgage may lose value as rates go down because of prepayments.
Negative Convexity
In callable bonds, a situation in which the principal is returned, either before maturity when interest rates are declining or after maturity when interest rates are rising. This exposes bondholders to the risk of realizing a lower return.


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