SIE practice questionmediumZero-Coupon Bonds
Which statement is TRUE about zero-coupon bonds?
- AInterest is paid annually
- BThey are subject to phantom income tax✓ Correct answer
- CThey have low duration risk
- DThey pay interest at maturity only
Explanation
Why B — They are subject to phantom income tax
Zero-coupon investors owe taxes on imputed interest each year (phantom income), even though no interest is received until maturity. Payments are not annual or only at maturity, and duration risk is higher than that of coupon bonds.
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