Which One of the Following Statements Correctly Describes the Major

question 121

Multiple Choice

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

• A) 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.
• 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) The lack of an annual coupon basically prohibits the investor from locking in a high rate of return.
• D) Because there is no reinvestment of a coupon payment, large capital losses accrue when interest rates decline.

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Definitions:

Real Rate of Interest

Real Rate of Interest is the interest rate that has been adjusted to remove the effects of inflation, providing a more accurate measure of the cost of borrowing.

Rate of Inflation

This refers to the annual percentage increase in the general price level of goods and services in an economy over a period of time.

Effective Usury Laws

Laws designed to set maximum interest rates that can be charged on loans, to prevent lenders from charging excessively high rates.

Money Markets

Financial markets for short-term borrowing and lending, dealing in securities such as Treasury bills and commercial paper.