- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 6. Fixed-Income Bond Valuation: Prices and Yields
- Subject 1. Bond Pricing and the Time Value of Money
CFA Practice Question
Which of the following is correct? A zero coupon bond ______.
B. sells for a price that is greater than face value
C. has no interest payments and is thus non-taxable until maturity
D. is also known as a deep discount bond
E. provides no cash flow to the holder at maturity
A. typically pays coupons only during the first five years
B. sells for a price that is greater than face value
C. has no interest payments and is thus non-taxable until maturity
D. is also known as a deep discount bond
E. provides no cash flow to the holder at maturity
Correct Answer: D
User Contributed Comments 17
| User | Comment |
|---|---|
| Gina | recall that zeroes are taxable on a 'phantom' income. |
| melissatt | what's phantom income? |
| ostrich | phantom sounds scary |
| danlan | taxable even no coupon paid |
| Done | Once you get your CFA charter and start making tons of money buy zero munis! By then you will know how to analyze them. |
| magicchip | @ Done.. By that time half the US Municipalities and counties will be broke.. |
| dah62 | Phantom income? I think that phantom maths is the basis of the current British government's economic policy.... |
| dmfcrowe | zero coupon bonds "pay" interest semi annually, it is the amortization of the discount towards par. While you dont get any cash you do realise a capital gain which should be equal to the required return. |
| jpducros | Why not E ? |
| zkhan87 | b/c you're entitled to the principle |
| 2014 | also u have to pay tax on accrued interest income its also negative tax cashflow |
| johntan1979 | Treasury STRIPS |
| jonan203 | merideth whitney was right! |
| johntan1979 | Meredith |
| jasonkwk | Why not C? no coupon payment =no interest payment |
| ascruggs92 | jpducros: E is another way of saying "you don't get your principle investment back when the bond matures." |
| khalifa92 | @josankwk zero coupon bond has no coupon payment thus no tax til maturity. however, at maturity ull be taxed on the short term capital gain from price appreciation because all zero coupon bonds sell at discount (e.g. T-bill) |