hard · Certified Financial Planner General Principles
A zero-coupon bond has a maturity of 12 years and a current market price of $440. If the client's goal is to immunize a future liability exactly 12 years from today
Why is this bond the optimal choice?
- Because the lack of coupons eliminates the possibility of default risk over the 12-year period.
- Because the low current price of $440 guarantees a high internal rate of return (IRR) regardless of interest rate changes.
- Because it provides a linear price change estimate that is more accurate than coupon-bearing bonds.
- Because it has no coupon payments to reinvest, its Macaulay Duration is exactly equal to its maturity.
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