The IRS taxes zero coupon bonds as if interest were paid semiannually even though no cash flow is received until maturity.

Question

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This is correct. Zero coupon bonds are sold at a discount to their face value, with no periodic interest payments made. Although no cash flow is received until maturity, the IRS taxes the accrued interest on zero coupon bonds each year as if it were paid semiannually. This is often referred to as "phantom income," since the bondholder does not receive any actual cash flow from the bond until maturity.

The IRS Taxes Zero Coupon Bonds as If Interest Were