Question

Which of the following statements is CORRECT?

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.

Long-term bonds have less price risk but more reinvestment risk than short-term bonds.

If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less price risk.

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

Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.

Answer 1

The correct answer is Option D

The Zero coupon bond has Higher price risk because it pays all the amount at the date of the maturity, So, smaller percentage change can lead to greater price risk and it has low reinvestment risk because it doesn't pay interest till the maturity.

The Treasury bond zero coupon bond is considered as risk free asset and it is tax exempt also long term bonds have greater price risk than short term bonds because the cash flows are discounted for greater period of time.