CFA Practice Question
An analyst is examining the impact of a decline in the level of market rates on the realized return from a callable bond. The analyst is considering the impact of a one-time decline of 100 basis points on the bond's required return. The bond issuer is expected to call the bond in this scenario. The bond is callable on the first coupon payment five years prior to the maturity date. Select the best answer:
B. The realized return computation will include a final cash flow equal to the conversion price.
C. The realized return computation will include a final cash flow equal to the call price.
A. The realized return computation will include a final cash flow equal to par value.
B. The realized return computation will include a final cash flow equal to the conversion price.
C. The realized return computation will include a final cash flow equal to the call price.
Correct Answer: C
The call provision can affect the number of payments and the size of payments from a callable bond.
User Contributed Comments 4
| User | Comment |
|---|---|
| surob | Didn't understand. Can someone help? |
| jerylewis | The last payment received by bondholder in this case is the call price, not the par value of the bond. If issuer exercises the call option, the holder will receive the call price as LAST cash inflow |
| chamad | Assumption:decline in the level market rates. An issuer is more likely to call the bond...so the last inflow will be the callable price |
| 2014 | u cannot assume that it would be called at par value unless stated in this question. If u had sinking fund in this question as additional information then call price is par value |