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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.
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.
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.
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.
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.