Investment VehiclesQuestion 79 of 100
A zero-coupon bond:
a.Pays semiannual interest at a high rate
b.Is always tax-free
c.Has no interest-rate risk
d.Is issued at a discount and pays no periodic interest, maturing at face value
Explanation
A zero-coupon bond is sold at a discount to face value and pays all its return at maturity, with no periodic coupons. Its long effective duration makes it highly sensitive to interest-rate changes. Holders may owe tax annually on imputed interest despite receiving no cash.
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