Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process.

Question

Quizplus · Accepted Answer

Zero-coupon assets do not pay any interest during their life but are sold at a discount to their face value, providing a fixed return at maturity. Therefore, investing in a zero-coupon asset with a maturity equal to the desired investment horizon eliminates the uncertainty associated with changes in interest rates. The investor knows exactly how much they will receive at maturity, assuming no default risk.

Investing in a Zero-Coupon Asset with a Maturity Equal to the Desired