Which one of the following statements correctly describes the major drawback of a zero- coupon bond?
A) Unless the bond is held in a tax-sheltered account, the investor must pay taxes on the annual accrued interest even though no interest is actually received.
B) The conversion feature found on most zero-coupon bonds generally requires the investor to switch to a coupon-bearing bond after a period of 5 years.
C) The lack of an annual coupon basically prohibits the investor from locking in a high rate of return.
D) Because there is no reinvestment of a coupon payment, large capital losses accrue when interest rates decline.

Question

Quizplus · Accepted Answer

Zero-coupon bonds do not pay interest periodically. Instead, they are sold at a discount and mature at face value. The IRS requires investors to pay taxes on the imputed interest each year, even though the interest is not received until the bond matures. This can be a drawback for investors who do not hold these bonds in tax-advantaged accounts.

Which One of the Following Statements Correctly Describes the Major