SIE Exam Question 802: Answer and Explanation

Question: 802

Which of the following are characteristics of a zero-coupon bond?

(1) It does not make periodic interest payments throughout the term of the bond.

(2) It has significant reinvestment risk because no payments are made until the bond matures.

(3) It requires taxes to be paid on accrued interest each year, even though no interest is received.

(4) The duration of a zero-coupon bond is less than its term to maturity.

  • A. (1) and (3) only
  • B. (2) and (4) only
  • C. (1), (2), and (3) only
  • D. (2), (3), and (4) only

Correct Answer: A

Explanation:

A zero-coupon bond does not make periodic interest payments, however it requires taxes to be paid on accrued interest each year. A zero-coupon bond has no reinvestment risk, and its duration is equal to its term to maturity.

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