SIE Understanding Products and Their Risks Question 6: Answer and Explanation

Question: 6

Which of the following is a benefit of owning a Treasury zero-coupon bond?

• A. Typically declines in price when the Federal Reserve cuts rates
• B. Decreases price responsiveness to interest rate changes as the term to maturity increases
• C. Makes quarterly interest payments
• D. Eliminates reinvestment risk

Correct Answer: D

Explanation:

D: Eliminating reinvestment risk is the benefit of constant reinvestment of interest because no payments are made prior to maturity. Choice A is incorrect because their price typically increases when the Federal Reserve cuts rates. Choice B is incorrect because it will have an increasing price responsiveness to interest rate changes as the term to maturity increases. Choice C is incorrect because it makes no interest payments prior to maturity.