CFA Practice Question

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CFA Practice Question

Bob buys a bond with a death put for $1,000. It matures in 10 years and pays a 5% coupon each year. Par value is $1,000. If Bob dies in year 2, while interest rates have spiked to 8% and the bond is now trading at $800, how much will Bob's estate get from the bond?

A. $800
B. $1,000
C. not enough information
Correct Answer: B

Bob's estate can exercise the death put option and sell the bond back to the issuer for $1,000. Bob's estate doesn't lose money on an increase in interest rates because of the death put feature.

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