Question

Which one of the following statements about zero coupon bonds is NOT true?

A) Zero coupon bonds have no coupon payments but promise a single payment at maturity.
B) Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments.
C) Zero coupon bonds make coupon payments but no principal payment at maturity.
D) All of the above statements are true.

Answer 1

Zero coupon bonds do not make coupon payments but promise a single payment at maturity. This type of bond is sold at a discount to their face value because they do not make periodic coupon payments. Therefore, the statement that zero coupon bonds make coupon payments but no principal payment at maturity is not true.

Step-by-step explanation:

Zero coupon bonds are a type of bond that do not make periodic coupon payments but instead promise a single payment at maturity. This means that statement A is true. On the other hand, statement C is not true because zero coupon bonds do not make coupon payments but only make a principal payment at maturity.

As for statement B, it is also true. Zero coupon bonds are sold at a discount to their face value because they do not make periodic coupon payments. Investors are willing to buy these bonds at a lower price to compensate for the lack of coupon payments.

Therefore, the correct answer is C) Zero coupon bonds make coupon payments but no principal payment at maturity, as this statement is not true.