Zero coupon bonds do not pay periodic interest and are sold at a discount. The implicit interest is calculated by amortizing the difference between the purchase price and the face value over the life of the bond.

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A Zero Coupon Bond

Question 24

Multiple Choice

A zero coupon bond:

A) is sold at a large premium.
B) has a price equal to the future value of the face amount given a specified rate of return.
C) can only be issued by the U.S. Treasury.
D) has less interest rate risk than a comparable coupon bond.
E) has implicit interest which is calculated by amortizing the loan.

Correct Answer: