Question

Which of the following statements is true for zero coupon bonds (other things being equal)?

Select one:

a. Their price increases as market interest rates rise.

b. Their price falls as they approach their maturity date.

c. They always trade at a discount.

d. Their price remains constant throughout their life.

Answer 1

Zero coupons bonds are bonds which do not pay any interest over its maturity period. These bonds are issued at discount and redeemed at par. The difference between issue price and par value of bond is the return earned by investors by investing in these bonds.

Bond price and interest rate have inverse relation. The increase in interest rate would decrease the price of bond.

Thus, option (a) is incorrect.

The price of zero coupon bond would increase as they approach maturity date as the value of bond would increase.

Thus, option (b) is incorrect

The price of zero coupon bond does not remain constant over its life as the maturity nears the price of bond increases.

Thus, option (d) is incorrect

Zero coupon bond are issued at discount and are redeemed at par. This way it investors would earn return on their investment.

Thus, option (c) is correct