A:
Zero coupon bonds are frequently cited as a popular investment vehicle for education savings. What are the main characteristics of these instruments?
I. They pay semi-annual interest payments on $1,000 par.
II. They are bought at a deep discount from face and mature for face.
III. They are government guaranteed
IV. They pay no interest
a) II, III, IV
b) I, III
c) II, IV
d) II, III
The correct answer is c.
Zero coupon bonds, as the name implies, pay no interest or coupon payments. They are bought (and traded) at a discount from face, and mature for face. The investor’s only return is the difference between the discount purchase price and face at maturity. Although one popular type of zero coupon bond, U.S. Treasury STRIPS, is government guaranteed; this does not apply to all such bonds.
RELATED FAQS
  1. How do debit spreads impact the trading of options?

    Find out what it means when a bond has a coupon rate of zero and how a bond's coupon rate and par value affect its selling ... Read Answer >>
  2. If an investor has a required rate of return of 10% on a 20-year zero ...

    The correct answer is d. The value of a zero coupon bond is the present value of the lump-sum principal payment. There is ... Read Answer >>
  3. How do I calculate yield to maturity of a zero coupon bond?

    Find out how to calculate the yield to maturity for a zero coupon bond, and see why this calculation is more simple than ... Read Answer >>
  4. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
  5. Why do zero coupon bonds tend to be volatile?

    Learn why the price of zero coupon bonds is volatile and why some investors may wish to hold them in retirement accounts ... Read Answer >>
  6. How does a bond's coupon rate affect its price?

    Find out how a bond's coupon rate influences its price, including the role of government-dictated interest rates and the ... Read Answer >>
Related Articles
  1. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  2. Financial Advisor

    Using Excel PV Function to compute Bonds PV

    To determine the value of a bond today - for a fixed principal (par value) to be repaid in the future at any predetermined time - we can use an Excel spreadsheet.
  3. Personal Finance

    Coupon Shopping: Clip Your Way To Savings

    Use coupons strategically to score big savings on everyday purchases.
  4. Investing

    What is a "Coupon"?

    In the financial world, “coupon” represents the interest rate on a bond.
  5. Investing

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  6. Investing

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  7. Investing

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  8. Personal Finance

    6 Sneaky Ways Coupons Make You Spend More

    If you're hoping to save money by using coupons, watch out for sellers' strategies.
  9. Personal Finance

    6 Tricks To Make Coupons Work For You

    Use these strategies to counteract the stores' and manufacturers' coupon tactics and come out ahead.
  10. Investing

    If I Buy A $1,000 10-Year Bond With A 10% Coupon, Will I Receive $100 Each Year?

    Investors can count on a fixed-income security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesn’t default.
RELATED TERMS
  1. Zero-Coupon Bond

    A debt security that doesn't pay interest (a coupon) but is traded ...
  2. Coupon Rate

    The yield paid by a fixed income security. A fixed income security's ...
  3. Coupon Bond

    A debt obligation with coupons attached that represent semiannual ...
  4. Current Coupon Bond

    A bond with a coupon rate that is within 0.5\% of the current ...
  5. Ex Coupon

    A bond or preferred stock that does not include the interest ...
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage ...
Hot Definitions
  1. Quadruple Witching

    The expiration date of various stock index futures, stock index options, stock options and single stock futures. All stock ...
  2. Co-pay

    A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such ...
  3. Protectionism

    Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local ...
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Demonetization

    Demonetization is the act of stripping a currency unit of its status as legal tender and is necessary whenever there is a ...
  6. Investment

    An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic ...
Trading Center