Convexity is defined as the property of a financial instrument that dictates the amount by which its value changes with changes in market rates. For example, a MBS is said to have negative convexity if its price rises by an amount p1 when yields fall, and its price falls by an amount p2 when yields rise, and if p1<p2. Negative convexity is undesirable for the investor. Graphically, the curve of the instrument’s price against its yield will be a concave curve.
