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Shift 29/05/2023 3:30 PM - 6:30 PM
Correct Answer
Interest is not paid on collateral debentures, also known as zero-coupon debentures. These debentures are structured in a way that does not involve regular interest payments to bondholders.
Instead of receiving periodic interest payments, investors in collateral or zero-coupon debentures purchase them at a discounted price (less than the face value) and receive the face value when the debentures mature. The difference between the purchase price and the face value of the debentures represents the effective interest earned over the life of the investment.
The absence of regular interest payments is a distinctive feature of zero-coupon debentures, and they are appealing to investors who are looking for a lump-sum payment at maturity rather than periodic interest income. However, it's essential for investors to be aware of the tax implications and cash flow considerations associated with this type of investment. The tax treatment of zero-coupon debentures can vary depending on local tax laws.
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