- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 27. The Arbitrage-Free Valuation Framework
- Subject 1. Arbitrage-Free Valuation for an Option-Free Bond
CFA Practice Question
Reconstitution of Treasury strips occurs when:
B. the stripped value of the bond is equal to the market price of the Treasury bond.
C. the strips in the market are priced less than the Treasury bond value.
A. the Treasury bond as priced in the market is priced less than its stripped value.
B. the stripped value of the bond is equal to the market price of the Treasury bond.
C. the strips in the market are priced less than the Treasury bond value.
Correct Answer: C
User Contributed Comments 7
| User | Comment |
|---|---|
| sonderfall | What does "reconstitution" mean? Could someone help, please? |
| gaur | breaking a Treasury bond down into coupon and maturity peices is known as stripping. Taking these stripped securities and making a Treasury bond = Reconstitution |
| achu | C is the only answer which makes economic sense. In C, you buy the parts which cost less than buying the item (bond) whole, but there's nothing to prevent you from reconstituting in other circumstances. |
| mattg | If the pieces are less valuable than the whole, makes sense to put the pieces together and sell the whole => RECONSTITUTION |
| gracecfa | Stripping: market price < arbitrage-free value Reconstitution: market price > arbitrage-free value |
| kpischinas | nice and simple gracecfa |
| johntan1979 | STRIPS is always priced lower, because that's the whole point of stripping. |