A Portfolio Manager at a Mutual Fund is evaluating two bonds, Bond A and Bond B, both of which have the same Modified Duration of 7.5 years. However, Bond A has significantly higher Convexity than Bond B. If the market interest rates (YT

Modified Duration measures the linear relationship between price and yield. A 1% drop in rates suggests a 7.5% increase in price ( ). Duration underestimates the price increase when rates fall and overestimates the price decrease when rates rise.   However, the Price-Yield relationship is curved (convex), not a straight line. Bond convexity measures the non-linear, curved relationship between a bond's price and its yield, indicating how much a bond's duration changes as interest rates fluctuate. It acts as a second-order risk management tool, refining duration estimates to show that bond prices change at different rates depending on whether interest rates rise or fall.    A bond with higher convexity will always perform better than a bond with lower convexity (all else being equal) because:

• When rates fall, the price rises more than duration predicts.
• When rates rise, the price falls less than duration predicts