Which One of the Following Statements Correctly Describes the Major

question 57

Multiple Choice

Which one of the following statements correctly describes the major drawback of a zero- coupon bond?

• A) The lack of an annual coupon basically prohibits the investor from locking in a high rate of return.
• B) The conversion feature found on most zero- coupon bonds generally requires the investor to switch to a coupon- bearing bond after a period of 5 years.
• C) Because there is no reinvestment of a coupon payment, large capital losses accrue when interest rates decline.
• D) Unless the bond is held in a tax- sheltered account, the investor must pay taxes on the annual accrued interest even though no interest is actually received.

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