What type of bond is free from reinvestment risk?

What type of bond is free from reinvestment risk?

• A. Mortgage-Backed Securities (MBS)
• B. 30 Year Zero Coupon Bond
• C. 5 Year T Bond
• D. AAA Corporate Bond

Answer: (B)

The 30-year zero-coupon bond is free from reinvestment risk because it does not make periodic interest payments. Instead, it is sold at a discount and matures at its face value, providing a single payment at maturity. Since there are no cash flows during the life of the bond that could be reinvested at uncertain future rates, investors are not exposed to the risk of having to reinvest those payments at lower interest rates. This contrasts with the other options, which may require reinvestment of periodic income, thus exposing them to reinvestment risk.

The 30-year zero-coupon bond is free from reinvestment risk because it does not make periodic interest payments. Instead, it is sold at a discount and matures at its face value, providing a single payment at maturity. Since there are no cash flows during the life of the bond that could be reinvested at uncertain future rates, investors are not exposed to the risk of having to reinvest those payments at lower interest rates. This contrasts with the other options, which may require reinvestment of periodic income, thus exposing them to reinvestment risk.