negative convexity definition

negative convexity

Situation in which the principal of a callable bond is returned (1) before the maturity date in declining interest rate environment or (2) after the maturity date in rising interest rate environment. The first situation may require the reinvestment of the principal at prevailing lower interest rates (call risk), the second may result in losing the opportunity to earn prevailing higher interest rates (extension risk).

negative convexity is in the Investing, Securities & Futures Trading and Statistics, Mathematics, & Analysis subjects.

negative convexity appears in the definition of the following term: convexity

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