The disadvantage of a zero-coupon bond to an investor is that the annual increase in the bond is taxable as ordinary income and no annual cash payments are received to pay for the tax charges.

Question

Quizplus · Accepted Answer

A zero-coupon bond is sold at a discount and pays no annual interest, so the increase in its value each year is considered taxable income. However, since no cash payments are received until maturity, the investor may not have any cash to pay for the tax charges. This can be a disadvantage for some investors.

The Disadvantage of a Zero-Coupon Bond to an Investor Is