CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Reconstitution of Treasury strips occurs when:

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.
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