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?

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

A They eliminate reinvestment risk as there are no periodic coupon payments

B They provide higher annual yields due to frequent interest payments

C They allow investors to reinvest coupon payments at varying interest rates

D They offer variable interest rates instead of fixed returns

E They are riskier due to higher sensitivity to market fluctuations

Detailed Solution