SIE practice questionmediumZero-coupon bonds
What tax issue is unique to zero-coupon bonds?
- ATax-exempt interest
- BPhantom income (tax on imputed interest)✓ Correct answer
- CCapital gains treatment for all interest
- DInterest is only taxed at maturity
Explanation
Why B — Phantom income (tax on imputed interest)
Zero-coupon bondholders owe tax on accreted (imputed) interest annually, even though no cash is received (phantom income). Only municipal bonds may be tax-exempt.
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