Do zero coupon bonds have interest rate risk?
Zero coupon bonds, also known as discount bonds, are a popular investment option for many investors due to their simplicity and potential for high returns. However, one question that often arises is whether these bonds are exposed to interest rate risk. In this article, we will explore the relationship between zero coupon bonds and interest rate risk, and discuss how it affects their value and investment performance.
Interest rate risk refers to the potential for the value of a bond to fluctuate due to changes in market interest rates. When interest rates rise, the value of existing bonds typically falls, and vice versa. This is because new bonds issued at the higher interest rates offer higher yields, making the existing bonds less attractive to investors. Now, let’s delve into how zero coupon bonds are affected by interest rate risk.
