Products & Their RisksQuestion 25 of 398
An investor holding a 30-year zero-coupon Treasury (STRIPS) is MOST exposed to which risk?
a.Interest-rate risk, because of its long duration
b.Default risk, because zero-coupons often default
c.Reinvestment risk on its coupon payments
d.Currency risk, because it is a foreign security
Explanation
A long-maturity zero-coupon bond has a very long duration, making its price highly sensitive to interest-rate changes. It has essentially no default risk (U.S. government) and no reinvestment risk because it pays no coupons, and it is not a foreign security.
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