SIE practice questionmediumZero-Coupon Bonds
An investor purchases a zero-coupon bond. Which of the following is TRUE?
- AThe investor receives all interest at the time of purchase
- BThe bond is purchased at a discount and the investor must pay taxes annually on imputed (phantom) interest✓ Correct answer
- CThe investor receives semiannual interest payments
- DZero-coupon bonds have less interest rate risk than comparable coupon-bearing bonds
Explanation
Why B — The bond is purchased at a discount and the investor must pay taxes annually on imputed (phantom) interest
Zero-coupon bonds pay no periodic interest — they are purchased at a deep discount and mature at par. However, the IRS requires holders to pay taxes annually on the imputed (accreted) interest even though no cash is received (phantom income). Zero-coupon bonds actually have MORE interest rate risk than coupon bonds of the same maturity because all cash flow comes at maturity.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 1,867+ SIE questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Debt Securities questions
- Which bond would be MOST sensitive to changes in interest rates?
- Which statement about callable bonds is TRUE?
- An investor in the 32% federal tax bracket is considering a municipal bond yielding 4%. What is the taxable equivalent…
- Which of the following bond ratings is considered investment grade?
- In the event of corporate bankruptcy, subordinated debentures are paid:
- Rank the following yields from lowest to highest for a bond trading at a premium: nominal yield, current yield, yield…
- Interest on U.S. Treasury securities is:
- A bond with a par value of $1,000 has an annual coupon rate of 6% and is currently trading at $900. What is the current…