With reference to Zero-Coupon Bonds, consider the following statements: 1. Zero-Coupon Bonds are issued at a discount and redeemed at face value upon maturity. 2. These bonds pay interest to the holder annually but at a reduced rate. 3. They are more sensitive to interest rate changes than regular interest-paying bonds. Which of the statements given above is/are correct? |ForumIAS

[A] 1 and 2 only

[B] 1 and 3 only

[C] 2 and 3 only

[D] 1, 2 and 3

Answer: B

Notes:

Explanation:

Statement 1 is correct: Zero-Coupon Bonds are issued at a discount and redeemed at face (par) value at maturity.
Statement 2 is incorrect: They do not pay periodic interest (coupon); instead, the investor gains from the difference between the purchase price and face value.
Statement 3 is correct: Because they have no interim cash flows, their prices are more sensitive to changes in interest rates compared to coupon-paying bonds.