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Bonds 204: Zero Coupon Securities

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1.
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).
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.
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.
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.
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.