Question

Which of the following is INCORRECT regarding interest rates?

An inverted yield curve serves as a negative indicator for the future state of the economy.

The yield curve typically slopes upward due to a positive term premium.

Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity.

Bonds with greater default risk typically trade at higher yield-to-maturities.

A positive term premium is caused in part by borrowers’ preference for long duration and lenders’ preference for short duration.

Answer 1

Correct answer: Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity.

Above statements are incorrect becasue Zero-coupon bonds are more sensitive to interest rate change than coupon bonds with the same time to maturity.

Zero coupon bonds does not pay periodic payments thus its duration ( average time to recover borrowed amount) higher than coupon bonds. A duration is measure of price sensitivity of bond with change in interest rate.

As duration of zero-bond is higher than coupon bond with same maturity thus, Zero-coupon bonds are more sensitive to interest rate change.