Which of the following statements are incorrect?
A) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunising against changes in interest rates.
B) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process.
C) Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunises against interest
D) Using a fixed-rate bond to immunisea desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

Question

Quizplus · Accepted Answer

Statement D is incorrect. The reinvested coupon payments from a fixed-rate bond are affected by changes in market interest rates, which can impact the overall return of the investment. The correct method of immunising against changes in interest rates is to invest in a zero-coupon bond with a maturity equal to the desired investment horizon. Statement A is correct in this regard. Statement B is incorrect because while using a zero-coupon bond can reduce interest rate risk, it does not eliminate it entirely. Statement C is also correct because investing in a fixed-rate asset with a duration equal to the investment horizon can help to minimise interest rate risk.

Which of the Following Statements Are Incorrect