Intermediate · Lesson 2 of 5

Duration and convexity

8 minute read · By Krishna Avadhani, Vestora Academy · Updated 18 October 2026

Duration measures how sensitive a bond's price is to interest rates. Modified duration of 7 means a 1 percentage point rise in yields cuts the price by about 7%. Longer maturities and lower coupons mean higher duration.

In 2022, as central banks raised rates rapidly, long-duration government bond funds fell 15-30%, a reminder that "safe" bonds carry rate risk.

Convexity measures how duration itself changes. Ordinary bonds have positive convexity: prices rise more when yields fall than they drop when yields rise by the same amount. Mortgage-backed securities and callable bonds can have negative convexity.

Formula

ΔP/P ≈ -D_mod x Δy + ½ x Convexity x (Δy)²

Key takeaways

Price change ≈ -Duration x Yield change.
Long, low-coupon bonds have the most rate risk.
Positive convexity helps bondholders.

Check your understanding

1. Modified duration 6, yields rise 0.5 percentage points. Approximate price change?

-0.5%
-3%
-6%
+3%

Show the answer

-3%. -6 x 0.5 = -3%.

2. Which bond has the highest duration?

2-year, 6% coupon
30-year, 2% coupon
5-year, 5% coupon
1-year, 0% coupon

Show the answer

30-year, 2% coupon. Long maturity and low coupon maximise duration.

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General education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.