CFA Practice Question

There are 490 practice questions for this study session.

CFA Practice Question

Which of the following is correct? A zero coupon bond ______.

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)
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