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.Absent 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. is correct as there is no interest payment before the maturity date, so there is no risk associated with changes in interest rates.
II. is correct because zero coupon bonds offer a fixed rate of return at the time of maturity, so the investor can be sure of the promised yield rate if the bond issuer does not default.
III. is correct because the duration of a zero coupon bond is always less than its time to maturity, which means it is less sensitive to interest rate changes. Therefore, it is a suitable choice for investors who want to match their investment horizon.

If You Choose a Zero Coupon Bond with a Maturity