Explanation

Zero-coupon bonds are NOT subject to reinvestment risk compared to coupon-bearing bonds of the same maturity.

Key Differences:

Coupon-Bearing Bonds:

• Pay periodic interest payments (coupons)
• These coupon payments must be reinvested at prevailing market rates
• If interest rates decline, the coupons are reinvested at lower rates, creating reinvestment risk

Zero-Coupon Bonds:

• Do not pay periodic interest payments
• All returns come from the difference between purchase price and face value at maturity
• Since there are no interim cash flows to reinvest, there is no reinvestment risk

Other Risks:

• Interest rate risk: Both types of bonds are subject to interest rate risk as bond prices move inversely with interest rates
• Credit risk: Both types are subject to credit risk (risk of issuer default)
• Liquidity risk: Both types may face liquidity risk depending on market conditions

Therefore, the absence of periodic coupon payments makes zero-coupon bonds immune to reinvestment risk, which is a key advantage over coupon-bearing bonds.