Products & RisksQuestion 45 of 125
A zero-coupon bond is purchased at a deep discount and:
a.Pays no periodic interest, returning full par value at maturity
b.Pays a floating coupon tied to inflation
c.Pays interest monthly until maturity
d.Is always issued by municipalities only
Explanation
A zero-coupon bond makes no periodic interest payments; the investor's return is the difference between the discounted purchase price and the par value received at maturity. Because there are no coupons to reinvest, zeros avoid reinvestment risk but are highly sensitive to interest rate changes.
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