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Bonds 204: Zero Coupon Securities

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1.
The price at which a zero coupon security is issued _______.
Choose wisely. There is only one correct answer.
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.
2.
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.
False. If the issuer defaults, the zero coupon bondholder may receive nothing for his or her investment.
3.
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. 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).
4.
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.
5.
A corporate zero coupon convertible bond _______.
Choose wisely. There is only one correct answer.
Can be converted from a bond to shares of company stock. Convertible bonds can be exchanged for stock.