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

A zero-coupon bond has more price risk because the duration of the zero-coupon bond is high. So when the interest rate in the market goes up, the price of the bond falls. As there are no coupon payments, so there is no reinvestment risk of the coupons received.

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