Bonds or debt securities play a significant role in economics and are quite popular among investors. All people purchasing bonds are likely to strive to maximize their profit due to them. Obviously, it is also necessary to realize that there are certain risks related to the bond’s cost. However, investors with a fixed investment horizon have an option for decreasing the risk factors affecting both the price and reinvestment.
The investor aiming to avoid the risks can utilize zero-coupon U.S. Treasury bonds: their duration should be the same as the investor’s horizon. This type of bond does not involve the payment of interest but provides the investors with a profit due to the low price during the purchase and higher price at the moment of sale. According to Smith (2022), Treasury bonds “often rise dramatically in price when stock prices fall.” Since the bond’s value is inversely proportional to the rate of market and the duration time, the investors with a fixed horizon quite attentively consider the opportunity to use them. Therefore, those who have a fixed investment horizon can utilize zero-coupon bonds as a type of security to reduce the price risk and the reinvestment risk.
As for the real payoff that is implemented only once in this case, zero-coupon U.S. Treasury bonds are pretty reliable. If securities of this type are “held until maturity, the payout will be predetermined and does not change” (Smith, 2022). However, those who decide to sell them before maturity cannot be sure that they get the same sum they paid: it can be bigger or smaller. Thus, in most cases, the real payoff offered by Treasure bonds is predicted and protected.
Reference
Smith, L. (2022). Advantages and risks of zero-coupon U.S. Treasury bonds. Investopedia. Web.