Which of the following is true of zero coupon bonds?

• A. They pay interest annually at a fixed coupon rate.
• B. They do not pay periodic interest but are issued at a discount and redeemed at face value at maturity.
• C. They are always issued at their face value.
• D. They pay interest only at the time of issuance.

Answer: (B)

Verified step by step guidance

1. Understand the concept of zero coupon bonds: Zero coupon bonds are a type of bond that does not pay periodic interest (coupon payments). Instead, they are issued at a discount to their face value and redeemed at their full face value upon maturity.
2. Compare zero coupon bonds to regular bonds: Regular bonds typically pay interest periodically (e.g., annually or semi-annually) at a fixed coupon rate. Zero coupon bonds differ because they do not have these periodic interest payments.
3. Analyze the statement 'They pay interest annually at a fixed coupon rate': This is incorrect because zero coupon bonds do not pay periodic interest.
4. Evaluate the statement 'They do not pay periodic interest but are issued at a discount and redeemed at face value at maturity': This is correct and aligns with the definition of zero coupon bonds.
5. Review the remaining statements: 'They are always issued at their face value' is incorrect because zero coupon bonds are issued at a discount. 'They pay interest only at the time of issuance' is also incorrect because zero coupon bonds do not pay interest at issuance or periodically.