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Bonds 204: Zero Coupon Securities

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1.
A strip can be based on _______.
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Either A or B. Strips are based on either the interest or principal of government securities, which are separatedor strippedto back these kinds of instruments.
2.
The price at which a zero coupon security is issued _______.
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Is far below its par. Zero coupons are issued at prices far below the par, or face value, which the bond issuer pays when the bond matures.
3.
If a corporate zero coupon bond issuer defaults on its bonds, the bondholder still collects the par value of the bonds.
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False. If the issuer defaults, the zero coupon bondholder may receive nothing for his or her investment.
4.
Even though zero coupon securities do not pay regular interest payments, you still pay taxes on your earnings as they accrue.
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True. The growth that accumulates in zeros is taxable as it accrues (with the exception of some government zeros, which may be tax-free municipals or tax-deferred US savings bonds).
5.
A bond's coupon refers to _______.
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Its annual interest payments. A bond's coupon is the rate of annual interest the issuer pays to the bondholder.