If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct?
I. You will have no interest rate risk on this bond.
II. In the absence of default, you can be sure you will earn the promised yield rate.
III. The duration of your bond is less than the time to your investment horizon.

Question

Quizplus · Accepted Answer

I. A zero-coupon bond has no reinvestment risk, as there are no coupon payments to reinvest. Therefore, the only risk is interest rate risk, which is eliminated if the investment horizon and the maturity match.
II. A zero-coupon bond promises to pay a fixed amount at maturity, and as long as there is no default, the investor can be guaranteed to earn the promised yield rate.
III. The duration of a zero-coupon bond is equal to its maturity, which matches the investment horizon in this case. Therefore, the duration is also less than (or equal to) the time to the investment horizon.

If You Choose a Zero-Coupon Bond with a Maturity That