A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.

Question

A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds. ​

Quizplus · Accepted Answer

Zero-coupon bonds have a higher duration than bonds that pay periodic interest, making them more sensitive to changes in interest rates. Therefore, a portfolio of zero-coupon bonds will benefit more from declining interest rates through higher price appreciation compared to a portfolio without zero-coupon bonds.

A Bond Portfolio Containing a Large Portion of Zero-Coupon Bonds