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Bonds 204: Zero Coupon Securities

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1.
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.
2.
Earnings on zero coupon securities are taxed as capital gains.
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False. Earnings on zeros are interest and are taxed as regular income (with the exception of some tax-free government zeros).
3.
A corporate zero coupon convertible bond _______.
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Can be converted from a bond to shares of company stock. Convertible bonds can be exchanged for stock.
4.
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.
5.
The ZERO in the term ZERO COUPON means _______.
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The security does not pay any interest until maturity. Hence, it has a zero coupon.