Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Zero Coupon Bonds

Financial Accounting

11. Long Term Liabilities

Zero Coupon Bonds

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Multiple Choice

Which of the following best describes the primary difference between an original issue discount (OID) bond and a zero coupon bond?

OID bonds are not subject to income tax, whereas zero coupon bonds are fully taxable.

An OID bond pays periodic interest, while a zero coupon bond does not pay any interest until maturity.

Zero coupon bonds have a fixed coupon rate, while OID bonds have a floating coupon rate.

A zero coupon bond is always issued at par, while an OID bond is issued at a premium.

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Verified step by step guidance

Step 1: Understand the concept of an Original Issue Discount (OID) bond. An OID bond is issued at a price lower than its face value, and it pays periodic interest to the bondholder. The discount represents the difference between the issue price and the face value, which is amortized over the life of the bond.

Step 2: Understand the concept of a Zero Coupon bond. A zero coupon bond is issued at a deep discount to its face value and does not pay periodic interest. Instead, the bondholder receives the face value at maturity, and the difference between the purchase price and the face value represents the interest earned.

Step 3: Compare the interest payment structure. OID bonds pay periodic interest throughout their life, while zero coupon bonds do not pay any interest until maturity.

Step 4: Clarify the tax implications. Both OID bonds and zero coupon bonds are subject to income tax on the accrued interest, even if the interest is not paid periodically. This is because the IRS considers the increase in value of the bond as taxable income.

Step 5: Address the incorrect statements in the options. Zero coupon bonds do not have a fixed coupon rate because they do not pay periodic interest. They are issued at a discount, not at par. Similarly, OID bonds are issued at a discount, not a premium, and they do not have a floating coupon rate.