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 semiannual 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
I. They pay semiannual 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 investorâ€™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.
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 investorâ€™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

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 >> 
If an investor has a required rate of return of 10% on a 20year zero ...
The correct answer is d. The value of a zero coupon bond is the present value of the lumpsum principal payment. There is ... Read Answer >> 
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 >> 
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 >> 
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 >> 
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 governmentdictated interest rates and the ... Read Answer >>
Related Articles

Investing
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
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. 
Personal Finance
Coupon Shopping: Clip Your Way To Savings
Use coupons strategically to score big savings on everyday purchases. 
Investing
What is a "Coupon"?
In the financial world, â€ścouponâ€ť represents the interest rate on a bond. 
Investing
How Does A Bondâ€™s Coupon Interest Rate Affect Its Price?
All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays. 
Investing
Explaining the Coupon Rate
Coupon rate is the stated interest rate on a fixed income security. 
Investing
Understanding Bond Prices and Yields
Understanding this relationship can help an investor in any market. 
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. 
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. 
Investing
If I Buy A $1,000 10Year Bond With A 10% Coupon, Will I Receive $100 Each Year?
Investors can count on a fixedincome security paying them a certain amount of cash as long as the security is held until maturity and the issuer doesnâ€™t default.
RELATED TERMS

ZeroCoupon Bond
A debt security that doesn't pay interest (a coupon) but is traded ... 
Coupon Rate
The yield paid by a fixed income security. A fixed income security's ... 
Coupon Bond
A debt obligation with coupons attached that represent semiannual ... 
Current Coupon Bond
A bond with a coupon rate that is within 0.5\% of the current ... 
Ex Coupon
A bond or preferred stock that does not include the interest ... 
Coupon
The annual interest rate paid on a bond, expressed as a percentage ...