9-48 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 as yields decrease (and bond prices increase), the percentage price increase becomes greater than the percentage price decrease when yields increase (and bond prices decrease) by the same amount. This results in a greater capital gain effect for rate decreases (as the price increase is amplified) compared to the capital loss effect for rate increases (as the price decrease is dampened).

9-48 the Fact That the Capital Gain Effect for Rate