Convexity

The curvature in the relationship between a bond's price and its yield, which duration alone misses.

Because the relationship is curved rather than straight, a duration estimate understates the gain when yields fall and overstates the loss when they rise. Positive convexity is therefore valuable to a holder.

The correction matters for large yield moves and is negligible for small ones, which is why duration alone is adequate for most day-to-day work.

Bonds with embedded options can have negative convexity, which behaves the opposite way and is why callable bonds trade cheaply.