Question

An investor wants to avoid uncertainty of reinvesting periodic interest receipts.
Which instrument best suits this objective?

Q: Answer-An investor wants to avoid uncertainty of reinvesting periodic interest receipts. Which instrument b...

Reinvestment risk is the risk that an investor will not be able to reinvest periodic cash flows such as coupon payments at a rate comparable to the current investments rate of return. Zero-coupon bonds also known as Z-bonds or deep discount bonds do not pay periodic interest coupons. Instead, they are purchased at a discount to their face value and pay the full face value at maturity. Because there are no interim cash flows to reinvest, zero-coupon bonds eliminate reinvestment risk entirely.