Final answer:
Zero-coupon bonds have a duration of zero because they don't make periodic interest payments. They are considered more risky compared to other bonds due to the lack of interest income until maturity and the potential impact of interest rate changes. However, the risk can be managed through diversification and careful investment planning.
Step-by-step explanation:
Zero-coupon bonds, also known as discount bonds, have a duration of zero because they do not make periodic interest payments like other types of bonds. These bonds are sold at a discount to their face value and provide a single payment at maturity, which includes both the principal and interest.
While zero-coupon bonds offer the advantage of knowing the exact return at maturity, they are considered more risky compared to other bonds. The main risk is that the investor does not receive any interest income until the bond matures. Additionally, changes in interest rates can affect the value of the bond in the secondary market.
However, the risk associated with zero-coupon bonds can be managed by diversifying the investment portfolio and considering the investment horizon and goals.