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Bonds 204: Zero Coupon Securities

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1.
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).
2.
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.
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 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.
5.
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).