Bond Price Volatility. Chapter 4. Price Volatility Characteristics. Price Volatility of Option-Free Bond. Although the prices of all option-free bonds move in opposite direction from the change in yield required, the % price change is not the same for all bonds.
consider the 25-year 6% bond selling at 70.357 to yield 9%
market takes convexity into account when pricing bonds
but to what extent should there be difference?Convexity
As the required yield increases (decreases), the convexity of a bond decreases (increases). This property is referred to as positive convexity.
For a given yield and maturity, the lower the coupon, the greater the convexity of a bond.
For a given yield and modified duration, the lower the coupon, the smaller the convexity.Convexity