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Bonds 204: Zero Coupon Securities

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1.
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.
2.
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.
3.
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).
4.
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.
5.
The relative value of zero coupon securities depends on _______.
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Both A and B. The value of zero coupons in relation to other investments is based on both the creditworthiness of the issuer and the prevailing interest rates.