Free CSI CSC1 Exam Dumps October 2026

A long-term bond with a low coupon will maximize capital gains when interest rates fall. Here's why:

Long-term bonds are more sensitive to interest rate changes due to their longer duration, which amplifies the price movement.

Low coupon bonds are more affected by changes in interest rates compared to high coupon bonds because more of their value comes from the principal repayment rather than periodic interest payments.

Other options:

Short-term bonds: Have lower duration and less sensitivity to interest rate changes, so they do not maximize capital gains.

High coupon bonds: Are less sensitive to interest rate changes because of their higher periodic cash flows.

Volume 1, Chapter 7: Fixed-Income Securities: Pricing and Trading, section on 'Impact of Maturity and Coupon on Bond Prices' explains the relationship between interest rate changes, bond duration, and price sensitivity.