In
fixed income calculations, convexity estimates the amount
duration will change given a change in
interest rates.
Bond investors prefer bonds that have positive convexity. This is because when interest rates fall, the bond's duration increases, which makes the bond's price rise more. Conversely, when rates rise, the duration will shorten, and price losses will be less.
Bonds with embedded options (e.g. mortgage securities) have negative convexity. That is, duration extends as rates rise, and shortens as rates fall.