Final answer:
In a scenario with a downward sloping yield curve, the price of zero coupon bonds decreases as their maturity increases because short-term interest rates are higher than long-term rates.
Step-by-step explanation:
When evaluating the price of zero coupon bonds in relation to their maturity, especially in the context of a downward sloping yield curve, it's important to consider how interest rates affect bond values. In a scenario with a downward sloping yield curve, the price of zero coupon bonds decreases as their maturity increases because short-term interest rates are higher than long-term rates.
Typically, a downward sloping yield curve indicates that short-term interest rates are higher than long-term rates. For zero coupon bonds, this means that their price decreases as the maturity increases. This is because investors expect to be compensated with higher yields for short-term investments considering that they could reinvest their money at lower rates in the long-term.
The correct answer to the question is therefore: (a) The price of zero coupon bonds decreases with their maturity.