Question: Zero coupon bonds do not make explicit interest payments each period and the return is based on the total price appreciation. However, for tax purpose,

Zero coupon bonds do not make explicit interest payments each period and the return is based on the total price appreciation. However, for tax purpose, the amount of price appreciation each period is calculated and considered as 'implicit interest' or `accrued interest'. Such implicit interest unfortunately becomes taxable income of that period for the investors even though no actual payment is received.

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