Which of the following statements is CORRECT? a. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. b. Long-term bonds have less price risk but more reinvestment risk than short-term bonds. c. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. d. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

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01-10-2019
Business

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Which of the following statements is CORRECT? a. If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk. b. Long-term bonds have less price risk but more reinvestment risk than short-term bonds. c. Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk. d. One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

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Nyctalus Nyctalus · Answer 1 · 2019-10-04T06:54:42+02:00

Answer: Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more price risk but less reinvestment risk.

Explanation: Price risk refers to the risk of potential decrease in price of security due to the fluctuating market interest rates. Reinvestment risk refers to the risk that an investment might get cancel in between and the investor will not get same benefiting investment at that time.

A zero coupon bond have a maturity value that will be a paid at maturity so its price does get affected by the changing interest rate but it has to be paid at maturity so there will be no reinvestment risk.

Hence the correct option is C.