Bonds that offer no coupon payments but provide capital appreciation are categorized as______________?
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Answer: C. Zero coupon bond
Explanation
Zero coupon bonds do not make periodic interest payments and are sold at deep discounts. Investors receive capital appreciation when the bond matures and pays the full face value amount. The difference between the discounted purchase price and par value represents the investor interest return. Zero coupon bonds eliminate reinvestment rate risk because there are no interim coupon cash flows. Bond prices fluctuate inversely with market interest rates, affecting zero coupon bonds very aggressively. Imputed interest calculations require investors to pay taxes on annual price appreciation despite receiving no cash.
Parents often purchase zero coupon bonds to fund future college tuition expenses for their children. Retirement planners use these bonds to secure exact lump-sum payouts due on specific future dates. Corporate treasurers issue zero coupon debt when they want to defer cash interest outflows until maturity. Option A uses incorrect terminology since bonds generally appreciate to par rather than being depreciated. Option B is wrong because interest bonds pay periodic coupons rather than relying solely on appreciation. Option D uses non-standard terminology that fails to match established fixed income market definitions.
- Subject
- Accounting and Finance
- Category
- Finance
- Topic
- —
- Difficulty
- medium
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