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Answer: All three
All three statements are true. - **I. True** — Bonds with lower reinvestment exposure generally have more of their value concentrated in the final repayment, which tends to correspond to higher price sensitivity / duration, all else equal. - **II. True** — Realized return depends on the actual reinvestment rate earned on interim cash flows, so it often differs from the bond’s quoted yield-to-maturity. - **III. True** — A zero-coupon bond has no periodic coupon payments, so there are no interim cash flows to reinvest; therefore reinvestment risk is eliminated. **Correct answer: D**
Author: Manit Arora
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Question 1.2. Consider the following statements about bond reinvestment risk and bond duration (interest rate risk):
I. Lower bond reinvestment implies higher interest rate risk (duration), ceteris paribus II. Due to reinvestment risk, the yield-to-maturity on a bond is unlikely to equal the bond’s realized return III. Reinvestment risk is eliminated in a zero-coupon bond
Which of the above statements is (are) TRUE?
A
I only
B
I and II
C
II and III
D
All three
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