CFA Practice Question

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CFA Practice Question

The indenture for a callable bond contains a call price schedule that starts at 105% of par value on the first call date and declines systematically to a call price of 100% of par value on the bond's maturity date. In the absence of default by the bond issuer, ______

A. holders of this bond may receive a final payment as large as 105% of par value.
B. holders of this bond may receive a final payment as large as 95% of par value.
Correct Answer: A

The size of the final payment for this bond is uncertain because of the call provision and the associated call price schedule.

User Contributed Comments 8

User Comment
surjoy Can anyone explain the answer?
TheHTrader If the issuer decides to call at 105 for full issue then the bondholders will receive 105 for final payment.
jpducros mmmm, any other explanation ?
Jurrens It says "may" receive, meaning the next call date, the issuer may call the bond at 105%. However, if they do not, then they will receive 100% at maturity of the bond. They will never receive a "final payment" (meaning last payment, either from being called or maturity of bond) below 100%, so B cannot be right.
2014 In some callable issues, final price is uncertain to calculate because of call options. In addequte information in question best is A
jonan203 c'mon guys, you can never recieve less than par at maturity....unless you own greek debt and are forced to take a 50% haircut at gunpoint.
johntan1979 Like I said, some people should try playing golf for a change.
davidt876 good to see johntan back for level II
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