SIE practice questionmediumZero-Coupon Bonds
Which is a disadvantage of zero-coupon bonds?
- AThey pay monthly interest
- BThey have the lowest possible interest rate risk
- CThey cannot be purchased in retirement accounts
- DPhantom income is taxable annually even though no cash is received✓ Correct answer
Explanation
Why D — Phantom income is taxable annually even though no cash is received
Investors must pay taxes on imputed interest yearly (“phantom income”), though they receive no cash. Zeroes have high interest rate risk and can be held in IRAs.
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