What is a defining feature of a zero-coupon bond?

What is a defining feature of a zero-coupon bond?

• A. It pays periodic interest payments
• B. It is redeemed at full face value at maturity
• C. It is issued at a premium
• D. It is associated with high default risk

Answer: (B)

A zero-coupon bond is defined primarily by its structure, which does not involve periodic interest payments. Instead, it is sold at a discount to its face value and pays out the full face value at maturity. This means that the investor's return on the bond comes solely from the appreciation of the bond's value from the purchase price to the face value over the life of the bond. When the bond matures, the investor receives the face value, which is a key feature that distinguishes zero-coupon bonds from other types of bonds that typically provide regular interest payments. This makes the option regarding redemption at full face value at maturity the defining characteristic of a zero-coupon bond. The absence of periodic interest payments and the way they are structured is essential in understanding how they operate and the potential benefits and risks associated with investing in them.

A zero-coupon bond is defined primarily by its structure, which does not involve periodic interest payments. Instead, it is sold at a discount to its face value and pays out the full face value at maturity. This means that the investor's return on the bond comes solely from the appreciation of the bond's value from the purchase price to the face value over the life of the bond.

When the bond matures, the investor receives the face value, which is a key feature that distinguishes zero-coupon bonds from other types of bonds that typically provide regular interest payments. This makes the option regarding redemption at full face value at maturity the defining characteristic of a zero-coupon bond. The absence of periodic interest payments and the way they are structured is essential in understanding how they operate and the potential benefits and risks associated with investing in them.