Answer: Reinvestment risk

## 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.

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