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
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