[2008]Topic 24: Bond Prices, Discount Factors, and Arbitrage相关习题 statements, following, structure, contrast, interest

Baran

AIM 4: Compare and contrast the structure of Treasury coupon bonds and Treasury STRIPS, and differentiate between P-STRIPS and C-STRIPS.

 

1、Which of the following statements about zero-coupon bonds is FALSE?

A) The lower the price, the greater the return for a given maturity.
 
 
B) A zero coupon bond may sell at a premium to par when interest rates decline.
 
 
C) All interest is earned at maturity.
 
 
D) A zero-coupon bond provides a single cash flow at maturity equal to its par value.

Baran

The correct answer is B 

 Zero coupon bonds always sell below their par value, or at a discount prior to maturity. The amount of the discount may change as interest rates change, but a zero coupon bond will always be priced less than par.

Baran

2、Which of the following statements regarding U.S. Treasury issues is least accurate?

A) Investment bankers strip the coupons from Treasury notes and bonds to create zero-coupon securities.
 
 
B) A 5-year Treasury note can be stripped into 11 different zero coupon securities.
 
 
C) Due to the way Treasury STRIPS are taxed, U.S. investors may face negative cash flows before the maturity date.
 
 
D) The U.S. Treasury issues zero coupon notes, but not bonds.

Baran

 The correct answer is D

 

The Treasury does not issue zero-coupon notes or bonds. That is why STRIPS were created. A 5-year Treasury note can be stripped into 11 zero coupon securities, consisting of its 10 coupon payments and the principal repayment. The U.S. Internal Revenue Service regards the accrued interest on a zero coupon security as income on which the security holder must pay taxes even though he has not received a cash interest payment.