The government in the U.S. issues zero-coupon bonds up to one-year maturity, but STRIPS are "manufactured" zero-coupon bonds with maturities up to 30 years. So, for example, a financial institution could first buy 100 30-year coupon bonds issued by the government that each pays $10 of coupon every six months. The institution could then sell the combined coupons totaling $1,000 as a separate zero-coupon bond for each maturity ranging from 6 months up to 30 years. This is a financial innovation that occurred decades ago in the face of volatile inflation and increased demand for long-term zero-coupon government bonds. Given this information, analyze the following statement: "The price of a long-term STRIP will typically be lower than that of a short-term STRIP."

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The price of a longterm STRIP will typically be lower ... View the full answer