What does convexity represent and why is it important for bond investors?

• A. Convexity is the slope of the price-yield line.
• B. Convexity is the first derivative of price with respect to yield.
• C. Convexity is a measure of bond liquidity.
• D. Convexity accounts for the curvature of the price-yield relationship; positive convexity means price rises more when yields fall and falls less when yields rise.

Answer: (D)