Which statement about zero-coupon bonds relative to coupon bonds with the same maturity is true?

• A. Zero-coupon bonds have shorter duration.
• B. Zero-coupon bonds have the same duration as coupon bonds.
• C. Zero-coupon bonds have lower duration than coupon bonds due to no coupons.
• D. Zero-coupon bonds typically have higher duration due to lack of periodic cash flows.

Answer: (D)

Duration measures a bond’s sensitivity of price to changes in interest rates, based on the weighted average time to when cash flows are received. A zero-coupon bond has no interim cash flows; its only payment occurs at maturity, so the entire weight sits on that final payment. That makes its Macaulay duration equal to the time to maturity, which is longer than the duration of a coupon bond that makes periodic payments along the way. Because duration reflects how much a bond’s price will move with interest-rate changes, the zero-coupon bond will show greater price sensitivity for the same maturity. In other words, with no early cash flows to pull the weighted average toward the present, the zero-coupon’s duration—and thus its interest-rate risk—is higher.