Duration gives a straight-line estimate of price change, but the real price–yield relationship is curved. Convexity corrects for this: positive convexity means a bond gains more when rates fall than it loses when rates rise by the same amount, which is beneficial to the holder.
Formula
Price change ≈ −Duration × Δy + ½ × Convexity × (Δy)²
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Example
Two bonds with equal duration but different convexity will behave differently for large rate moves — the more convex one performs better.
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Relevant NISM series
CFA
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