Test your knowledge

Choose wisely. There is only one correct answer to each question.

Keep studying!

Review your answers below to learn more.

If a corporate zero coupon bond issuer defaults on its bonds, the bondholder still collects the par value of the bonds.

Choose wisely. There is only one correct answer.

True

False

False. If the issuer defaults, the zero coupon bondholder may receive nothing for his or her investment.

Even though zero coupon securities do not pay regular interest payments, you still pay taxes on your earnings as they accrue.

Choose wisely. There is only one correct answer.

True

False

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).

A bond's coupon refers to _______.

Choose wisely. There is only one correct answer.

The paper it's printed on

Its annual interest payments

Its par

Its maturity date

Its annual interest payments. A bond's coupon is the rate of annual interest the issuer pays to the bondholder.

The ZERO in the term ZERO COUPON means _______.

Choose wisely. There is only one correct answer.

The security has no par value

The security does not mature

The security does not pay any interest until maturity

The security does not generate capital gains

The security does not pay any interest until maturity. Hence, it has a zero coupon.

The price at which a zero coupon security is issued _______.

Choose wisely. There is only one correct answer.

Is far below its par

Is far above its par

Is equal to its par

May be above or below par

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.

© Copyright 2024 Morningstar, Inc. All rights reserved. Morningstar, the Morningstar logo, Morningstar.com, Morningstar Tools are either trademark or service marks of Morningstar, Inc. In addition, we encourage you to read this important disclosure.