What's the relationship between coupon rate and convexity?

Answer 1

Hey there,

Convexity is term for the non-linear relationship between changes in interest rates and a bond's price.

Normally, bonds with higher coupon rates, are less affected in price, due to changes in interest rates.

So, a bond with a higher coupon rate, will typically have a lower convexity (less price-sensitive).

A zero-coupon bond would have a very high convexity; as there is no coupon paid out.

Hope this helps.

-Jose