The IRS calls this imputed interest. Zero-coupon bonds are usually long-term investments ; they often mature in ten or more years.
Although the lack of current income provided by zero-coupons bond discourages some investors, others find the securities ideal for meeting long-range financial goals like college tuition. The deep discount helps the investor grow a small amount of money into a sizeable sum over several years. Because zero-coupon bonds essentially lock the investor into a guaranteed reinvestment rate , purchasing zero-coupon bonds can be most advantageous when interest rates are high. They are also more advantageous when placed in retirement accounts where they remain tax-sheltered.
Some investors also avoid paying taxes on imputed interest by buying municipal zero-coupon bonds, which are usually tax-exempt if the investor lives in the state where the bond was issued. The lack of coupon payments on zero-coupon bonds means their worth is based solely on their current price compared to their face value. Thus, prices tend to rise faster than the prices of traditional bonds when interest rates are falling, and vice versa. The locked-in reinvestment rate also makes them more attractive when interest rates fall. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions.
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How it works (Example):
How it works Example: What is a Small-Cap Stock? Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict. B bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed. C bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.
A sinking fund provisions requires the firm to redeem bonds over several years, either by open market purchase or at a special call price from bondholders. This can result in repurchase in advance of scheduled maturity at below-market prices. Collateralized bonds are considered the safest assets of the firm because they are backed by specific assets of the firm, rather than relying on the firm's general earning power.
D they promise either a fixed stream of income or a stream of income determined by a specific formula. This definition is given in the chapter's introduction. It helps the student understand the nature of bonds. B pays interest to the investor based on the general level of interest rates, rather than at a specified coupon rate. C pays interest to the investor without requiring the actual coupon to be mailed to the corporation.
Zero-coupon bonds pay no interest. Investors receive the face value at maturity. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. This type of bond is known as. Catastrophe bonds are used to transfer risk from the firm to the capital markets. The average inflation rate over the year was 4. What is the amount of the coupon payment you will receive and what is the current face value of the bond?
A annual interest divided by the current market price B the yield to maturity C annual interest divided by the par value D the internal rate of return E none of the above Answer: A is current yield and is quoted as such in the financial press. A commercial paper B corporate bonds C U. To earn a high rating from the bond rating agencies, a firm should have A a low times interest earned ratio B a low debt to equity ratio C a high quick ratio D B and C E A and C Answer: A above par value B below par C at or near par value D at a value unrelated to par E none of the above Answer: Accrued interest A is quoted in the bond price in the financial press.
B must be paid by the buyer of the bond and remitted to the seller of the bond. The invoice price of a bond that a buyer would pay is equal to A the asked price plus accrued interest. B the asked price less accrued interest. C the bid price plus accrued interest. D the bid price less accrued interest. E the bid price. The bond market A can be quite "thin". C consists of many investors on any given day.
Ceteris paribus, the price and yield on a bond are A positively related. C sometimes positively and sometimes negatively related. Bond prices and yields are inversely related. A pays interest on a regular basis typically every six months B does not pay interest on a regular basis but pays a lump sum at maturity C can always be converted into a specific number of shares of common stock in the issuing company D always sells at par E none of the above Answer: Callable bonds A are called when interest rates decline appreciably.
B have a call price that declines as time passes. C are called when interest rates increase appreciably.
The default risk premiums on the bonds issued by Shell and Ford, respectively, are A 1. The default risk premiums on the bonds issued by Mobil and Lucent Technologies, respectively, are: The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are A 1. A minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock B maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock C minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes D maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company E none of the above Answer: The yield to maturity on this bond is: A both bonds will increase in value, but bond A will increase more than bond B B both bonds will increase in value, but bond B will increase more than bond A C both bonds will decrease in value, but bond A will decrease more than bond B D both bonds will decrease in value, but bond B will decrease more than bond A E none of the above Answer: Use the following to answer questions E none of the above.
D none of the above. A the coupon rate is greater than the current yield and the current yield is greater than yield to maturity B the coupon rate is greater than yield to maturity C the coupon rate is less than the current yield and the current yield is greater than the yield to maturity D the coupon rate is less than the current yield and the current yield is less than yield to maturity E none of the above is true. Which one of the following statements about convertibles is true? E Convertibles are not callable.
The bond indenture includes A the coupon rate of the bond.
B the par value of the bond. C the maturity date of the bond. D all of the above. Bearer bonds are A bonds traded without any record of ownership. B helpful to tax authorities in the enforcement of tax collection. C rare in the United States today. E both A and C. B by the issuing corporation. C over the counter by bond dealers linked by a computer quotation system. D on a formal exchange operated by the American Stock Exchange.
E on a formal exchange operated by the Philadelphia Stock Exchange.
Zero-Coupon Bond - Full Explanation & Example | InvestingAnswers
The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A deferral. Convertible bonds A give their holders the ability to share in price appreciation of the underlying stock. B offer lower coupon rates than similar nonconvertible bonds. C offer higher coupon rates than similar nonconvertible bonds. D both A and B are true. E both A and C are true. TIPS are A securities formed from the coupon payments only of government bonds.
B securities formed from the principal payments only of government bonds. C government bonds with par value linked to the general level of prices. D government bonds with coupon rate linked to the general level of prices. E zero-coupon government bonds. Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict A required coupon rates for new bond issues. C the likelihood of a firm becoming a takeover target.
D the probability of a bond issue being called. Z-scores are used to predict significant bankruptcy risk. When a bond indenture includes a sinking fund provision A firms must establish a cash fund for future bond redemption. E none of the above is true. Subordination clauses in bond indentures A may restrict the amount of additional borrowing the firm can undertake. B are sometimes referred to as "me-first" rules. C provide higher priority to senior creditors in the event of bankruptcy.
D all of the above are true. E both B and C are true.
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All of the statements correctly describe subordination clauses. Collateralized bonds A rely on the general earning power of the firm for the bond's safety. B are backed by specific assets of the issuing firm. C are considered the safest assets of the firm.