Which of the following best describes a zero-coupon bond?

Which of the following best describes a zero-coupon bond?

• A. Government bond with periodic interest payments
• B. Bond that pays no interest but is sold at a discount
• C. Bonds that have fluctuating interest rates
• D. Bonds primarily issued by corporations

Answer: (B)

A zero-coupon bond is characterized by its method of payment and pricing. Unlike traditional bonds, which provide periodic interest payments, a zero-coupon bond does not pay interest during its term. Instead, it is issued at a discount to its face value, and the investor receives the full face value at maturity. This structure means the investor benefits from the difference between the purchase price (the discounted price) and the amount received at maturity, which represents the interest earned over the life of the bond. Choosing this option demonstrates an understanding of the defining feature of zero-coupon bonds—the absence of regular interest payments. This makes them different from government bonds that typically provide periodic interest, bonds with fluctuating interest rates, or corporate bonds which may not necessarily be structured as zero-coupon instruments. The unique nature of zero-coupon bonds makes option B the most accurate description.

A zero-coupon bond is characterized by its method of payment and pricing. Unlike traditional bonds, which provide periodic interest payments, a zero-coupon bond does not pay interest during its term. Instead, it is issued at a discount to its face value, and the investor receives the full face value at maturity. This structure means the investor benefits from the difference between the purchase price (the discounted price) and the amount received at maturity, which represents the interest earned over the life of the bond.

Choosing this option demonstrates an understanding of the defining feature of zero-coupon bonds—the absence of regular interest payments. This makes them different from government bonds that typically provide periodic interest, bonds with fluctuating interest rates, or corporate bonds which may not necessarily be structured as zero-coupon instruments. The unique nature of zero-coupon bonds makes option B the most accurate description.