Question

On January 1, 2018 you bought a zero coupon bond with 5 years to maturity at $ 675. On January 1, 2019 this bond traded at $ 731. What would be your taxable income from holding this bond in 2018, if straight-line method for interest deduction were used?

a. $ 67.25

b. $ 56

c. $ 32.5

d. $ 65

e. $ 0

Answer 1

Answer is $ 56
Particulars	Amount in $
Trade Value	731
Maturity Value	675
	56
Reason:
A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.
Some bonds are issued as zero-coupon instruments from the start, while others bonds transform into zero-coupon instruments after a financial institution strips them of their coupons, and repackages them as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price, much moreso than coupon bonds.
A zero-coupon bond is also known as an accrual bond.
KEY TAKEAWAYS
A zero-coupon bond is a debt security instrument that does not pay interest.
Zero-coupon bonds trade at deep discounts, offering full face value (par) profits at maturity.
The difference between the purchase price of a zero-coupon bond and the par value, indicates the investor's return.