Assume that the risk-free zero rates are increasing with maturity (That is,the 6-months zero rate is lower than the one-year zero rate,which is lower than the two-year zero rate,etc).It must be that:
A)The yield-to-maturity curve for coupon bonds lies below the yield-to-maturity curve for zeros
B)The yield-to-maturity curve for coupon bonds equals the yield-to-maturity curve for zeros
C)The yield-to-maturity curve for coupon bonds lies above the yield-to-maturity curve for zeros
D)The yield-to-maturity curve for coupon bonds lies above the yield-to-maturity curve for zeros for maturities less than one year,but lies below the yield-to-maturity curve for zeros for maturities greater than one year.

Question

Quizplus · Accepted Answer

When the risk-free zero rates are increasing with maturity, the yield-to-maturity curve for coupon bonds will lie below the yield-to-maturity curve for zeros. This is because the present value of the coupon payments on a coupon bond will be discounted at a higher rate than the present value of the face value on a zero-coupon bond.

Assume That the Risk-Free Zero Rates Are Increasing with Maturity