Negative convexity

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.
References in periodicals archive ?
The Guidelines also propose to compute additional adjustments to reflect the negative convexity as well as transaction costs and any relevant behavioural factors that may affect the modified duration of the instrument.
It has a similar maturity risk to the underlying mortgage but, because of its negative convexity, has a much greater volatility of return as expected maturity ebbs and flows.
Callable bonds contain negative convexity which may be defined as a characteristic of a bond, when the price appreciation is less than the price depreciation, for a large change in interest rates.
Equity exhibits a negative convexity. In Figure 6, equity is interest rate risk immune at a 10 percent interest rate.
IOs exhibit "negative convexity" and are considered a bearish investment.
A security that has negative convexity rises at a lesser pace than the corresponding change in interest rates.
Convexity refers to the price/yield curve; negative convexity means that the price/yield curve flattens as interest rates decline).
* Limited negative convexity. The prepayment lockouts and/or yield-maintenance provisions on most conduit loans make prepayment less tied to interest rates than for residential mortgage loans.
Negative convexity is the factor that generally concerns mortgage bankers.
* Mitigation of negative duration and (often) negative convexity
Because interest rates had been on a steady uptrend for years, pipeline fallout and negative convexity were merely academic concepts.
While most may not be familiar with the term, there's hardly a mortgage banker in America who has not had sleepless nights worrying about mortgage banking's peculiar curse of negative convexity. The rate of return on the servicing portfolio also possesses this feature.