The yield curve demonstrates the concept of the credit spread between corporate and government fixed income securities.
Duration is the time in years it takes a bond’s cash flows to repay the investor the total price of the bond.
A convex line is formed when the yield and price of a bond is graphed, and this line can exhibit positive or negative convexity.
If we draw a line tangent to the convex price-yield curve, we draw a line that is equal to duration. The relationship between the linear duration line and the convex price-yield curve allows us to determine the accuracy associated with using modified duration.
Bonds with greater convexity exhibit less volatility when there is a change in interest rates.