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

Question

Quizplus · Accepted Answer

Zero coupon bonds do not pay interest periodically, which eliminates reinvestment risk for those interest payments. However, they are more sensitive to changes in interest rates, hence have more price risk, compared to coupon-bearing bonds of the same maturity.

Which of the Following Statements Is CORRECT