Zero coupon bonds: are issued only by the U.S. Treasury. create annual taxable income to individual bondholders. create a tax deduction for the issuer only at maturity. are issued at a premium. are valued using simple interest.

Zero coupon bonds do not pay periodic interest but are issued at a discount and mature at par. One key feature is that although no actual interest payments are received during the life of the bond, the accretion of the discount (often referred to as "imputed interest" or Original Issue Discount) is taxable income to the bondholder each year. Let’s quickly review the options: • "are issued only by the U.S. Treasury." – This is incorrect. While the U.S. Treasury does issue zero coupon bonds (bills), corporations and other entities can also issue zero coupon bonds. • "create annual taxable income to individual bondholders." – This is correct. The imputed interest is taxable each year, even though no cash interest is paid until maturity. • "create a tax deduction for the issuer only at maturity." – Incorrect. There is no specific tax deduction solely at maturity related to this feature. • "are issued at a premium." – Incorrect. Zero coupon bonds are issued at a discount. • "are valued using simple interest." – Incorrect. They are typically valued using compound interest formulas. Therefore, the correct statement is: zero coupon bonds "create annual taxable income to individual bondholders."