The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.

Question

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Convexity in the yield-price relationship means that changes in interest rates have a non-linear effect on bond prices. Specifically, for a given change in interest rates, the percentage change in bond price will be greater for a decrease in rates than for an increase in rates. This results in a greater capital gain effect when rates decrease and a smaller capital loss effect when rates increase.

The Fact That the Capital Gain Effect for Rate Decreases