What is a key characteristic of zero-coupon bonds?

What is a key characteristic of zero-coupon bonds?

• A. They pay interest periodically
• B. They are sold at a premium
• C. They do not pay interest until maturity
• D. They have fluctuating interest rates

Answer: (C)

Zero-coupon bonds are defined by their unique structure, particularly the fact that they do not pay periodic interest payments like traditional bonds. Instead, they are sold at a discount to their face value and pay the full par amount at maturity. This means that the investor does not receive any interest payments during the life of the bond but realizes their return when the bond matures. The other choices describe characteristics not applicable to zero-coupon bonds. For instance, zero-coupon bonds are specifically known for offering no periodic interest payments, so the option stating they pay interest periodically is contradictory to their nature. Also, while zero-coupon bonds typically are sold at a discount rather than a premium, which specifically reflects their market behavior, the statement regarding fluctuating interest rates applies to different types of bonds and investment products, rather than zero-coupon bonds which have a fixed yield based on their pricing at issuance.

Zero-coupon bonds are defined by their unique structure, particularly the fact that they do not pay periodic interest payments like traditional bonds. Instead, they are sold at a discount to their face value and pay the full par amount at maturity. This means that the investor does not receive any interest payments during the life of the bond but realizes their return when the bond matures.

The other choices describe characteristics not applicable to zero-coupon bonds. For instance, zero-coupon bonds are specifically known for offering no periodic interest payments, so the option stating they pay interest periodically is contradictory to their nature. Also, while zero-coupon bonds typically are sold at a discount rather than a premium, which specifically reflects their market behavior, the statement regarding fluctuating interest rates applies to different types of bonds and investment products, rather than zero-coupon bonds which have a fixed yield based on their pricing at issuance.