Though it has several meanings in different contexts, it is usually defined as a tool that measures the sensitivity of bonds (or fixed-income securities) prices for large changes in their yields or interest rates (of the order of one basis point and more). Playing on convexity can prove particularly fruitful because buying a bond that exhibits high convexity, or curvature, in the price-yield relationship is analogous to purchasing partial insurance for interest rate risk. High convexity means that large changes of interest rates (± 2%) make capital gains resulting from a rate decrease more than offset the capital losses caused by an increase in interest rates.

Nonetheless, the convexity notion sometimes refers to the gamma ratio for interest rate options. Also, it indicates often the risk in bond portfolios or measures, too, the curvature of fixed-income instruments, as shown above. Finally, convexity is also synonymous for the small adjustment necessary for interest rate derivatives.