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Bonds 204: Zero Coupon Securities

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1.
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.
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.
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.
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.
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.