Question

An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be:

A)Credit risk.
B)Interest rate risk.
C)Reinvestment risk.
D)Purchasing power risk.

Answer 1

The major risk of purchasing Treasury STRIPS instead of Treasury Bonds is interest rate risk.

Step-by-step explanation:

The major risk of purchasing Treasury STRIPS instead of Treasury Bonds is Interest rate risk. Interest rate risk refers to the potential fluctuations in interest rates that can affect the value of fixed-income securities such as bonds. Since Treasury STRIPS are zero-coupon bonds that do not pay interest until maturity, they are more sensitive to changes in interest rates compared to bonds that pay regular interest payments.