Practice Quiz

FINRA Series 6

Category - Series 6

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Which of the following statements regarding zero-coupon bonds is true?
  1. An advantage of investing in zero-coupon bonds is that the bondholder does not receive interest income that he must pay taxes on each year and instead receives profits from the bond investment in the form of tax-preferred capital gain income when the bond matures.
  2. Only governments at the federal, state, or local levels, or government agencies are permitted to issue zero-coupon bonds.
  3. All else equal, zero-coupon bonds will have less price fluctuation when interest rates change.
  4. Although the bondholder receives no interim interest payments from his investment in zero-coupon bonds, the difference between the purchase price and the maturity value of the bond is considered to be interest income, and the bondholder must pay taxes on a percentage of this amount each year.
Explanation
Answer: D - The true statement about zero-coupon bonds is that although the bondholder receives no interim interest payments from his investment in zero-coupon bonds, the difference between the purchase price and the maturity value of the bond is considered to be interest income, and the bondholder must pay taxes on a percentage of this amount each year.
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