What Does It Mean When an Investor Says She Has

question 9

Multiple Choice

What does it mean when an investor says she has invested in a twenty-year zero-coupon bond?

• A) The investor is not receiving any return but the principal is safe for the period.
• B) The investor does not have to be concerned about investing the interest payments.
• C) The yield to maturity floats up and down with prevailing rates over the life of the bond.
• D) The investor receives direct deposits of annual interest payments without clipping coupons.
• E) The investment is locked in for the twenty year period because the investor cannot sell the bond.

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Definitions:

Interest Expense

The cost incurred by an entity for borrowed funds, reflected on the income statement as a charge against earnings.

Stock Options

Financial instruments that give the holder the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific time frame.

Owners' Interests

The equity interest held by shareholders in a corporation, reflecting their claim on the company's assets and earnings.

Complex Capital Structure

A situation where a company has multiple forms of equity, such as common and preferred shares, which can affect earnings per share calculations.