Final answer:
When you purchase and hold a zero coupon bond, there is only one cash flow, which occurs at the time of maturity when the bond's face value is repaid to the investor. Zero coupon bonds are distinct from traditional bonds, which provide multiple cash flows including periodic interest payments and the repayment of the principal. The correct option is 4.
Step-by-step explanation:
If you purchase and hold a zero coupon bond, there is only one cash flow. A zero coupon bond does not have periodic interest payments as a typical bond would. Instead, it is sold at a deep discount from its face value and the only cash flow comes at the maturity of the bond, when the face value is paid to the investor.
The zero coupon bond differs from other types of bonds described where an investor would receive periodic payments (for example, an annual interest of $80) plus the repayment of the principal amount ($1,000) at maturity. In the case of a traditional bond, the cash flows would include every interest payment and the return of principal, amounting to multiple cash flows throughout the lifetime of the bond.
Understanding interest rates and how they affect the attractiveness of bonds is also crucial. If interest rates rise, the value of existing bonds typically falls, as newer bonds may offer higher yields, thus current bondholders may reduce the price of their bonds to make them competitive in the market.
Hence, Option 4 is correct.