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      Question

      A zero-coupon bond is a debt security that does not pay

      periodic interest (coupon payments) but is instead issued at a discount to its face value. What is a key advantage of zero-coupon bonds compared to traditional bonds in terms of reinvestment risk?
      A They eliminate reinvestment risk as there are no periodic coupon payments Correct Answer Incorrect Answer
      B They provide higher annual yields due to frequent interest payments Correct Answer Incorrect Answer
      C They allow investors to reinvest coupon payments at varying interest rates Correct Answer Incorrect Answer
      D They offer variable interest rates instead of fixed returns Correct Answer Incorrect Answer
      E They are riskier due to higher sensitivity to market fluctuations Correct Answer Incorrect Answer

      Solution

      Zero-coupon bonds eliminate reinvestment risk because no interim interest is paid—returns are realized only at maturity.

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