Which of the following statements is CORRECT?
A) Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
B) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
C) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
D) Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
E) 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.

Question

Quizplus · Accepted Answer

Zero coupon bonds have more interest rate price risk because they do not pay periodic coupon payments that can be reinvested at different rates. However, they have less reinvestment rate risk because there are no coupon payments to reinvest. Thus, they are more sensitive to changes in interest rates.

Which of the Following Statements Is CORRECT