Negative Convexity

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Definition: Negative Convexity

Negative convexity is the feature of those bonds that loose value when the interest rates decreases and gains value when the interest rate increases.

The typical example of these kind of bonds are the mortgage backed securities, these have negative convexity because when the interest rate falls there is a risk that the borrower can repay the loan and can refinance it at a lower rate.

Negative Convexity

 

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