A zero-coupon bond is a type of bond that sells at a discount from its face value and gradually increases in value over time until maturity when the bondholder receives the full face value. Unlike regular bonds, zero-coupon bonds do not pay periodic interest (coupons) but instead accumulate interest over the bond's life.
Let's analyze each option:
* Option A: High-yield bonds
* Incorrect.
* High-yield bonds (junk bonds) offer higher interest rates due to higher risk but pay periodic interest rather than being sold at a discount and growing in value over time.
* Option B: Commodity-backed bonds
* Incorrect.
* Commodity-backed bonds are linked to the price of a commodity (e.g., gold, oil) rather than increasing in value over time from an initial discount.
* Option C: Zero coupon bonds
* Correct.
* These bonds are issued at a discount and increase in value each year as interest accrues.
* The investor receives the full face value at maturity, which includes the principal and accumulated interest.
* IIA Reference: Internal auditors evaluate investment risks, including bond valuation and discount amortization. (IIA Practice Guide: Auditing Investment and Treasury Functions)
* Option D: Junk bonds
* Incorrect.
* Junk bonds are simply high-risk, high-yield bonds that pay interest periodically and do not necessarily sell at a deep discount.
Thus, the verified answer is C. Zero coupon bonds.