Negative Convexity
What is Negative Convexity?
Negative convexity is a characteristic of a loan which is best depict by a notably strange pattern in a yield curve. The yield curve is a graph which compares the length of time a debt has left before repayment, Famous as the time to maturity, with the dominate interest rates.
That is to say that at some points the interest rate slopes downwards as the time to maturity increases. This is because the mortgages themselves are often based on varied mortgage rates. When interest rates fall, homeowners turn more likely to repay the loan quicker and pay it off in full earlier.
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