CFA Practice Question

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CFA Practice Question

The embedded options that are granted to the issuer of a bond MAY include ______.

I. the right to call the issue
II. the right of the underlying borrowers in a pool of loan to repay an amount in excess of the scheduled principal repayment
III. the accelerated sinking fund provision
IV. the cap on a floater
A. I, II and III
B. I, III and IV
C. I, II, III and IV
Explanation: I is a simple embedded option. III and IV are complex ones.

User Contributed Comments 9

User Comment
mtcfa Is a cap on a floater actually considered an option. I would think it is just more a feautre.
sarath Yes of course...
linr0002 the right of a borrower to prepayments is not an option granted to the issuer since the issuer does not have the ask borrowers to repay more.
h1bvisa what is an issuer? the issuer is the borrower, not NOT the underlying borrower(s). the option cannot be granted to the underlying borrowers.
dream007 hmmm...great question!
ramdabom think of mortgage prepayment as an example of II.
DonCap Key phrase: Excess principal payment. My car payment is 220, where 50 of that is interest so principal paid back is 170. I decide to make a payment next month of 250, which is an excess principle payment of 30 (200-170).
MattNYC I was tricked by the issuer/borrower dilemma as well. Good question. Recall for the exam that the issuer is the borrower for the entire pool, but there are individual borrowers that borrow from the issuer.
hvanwyk I think some of the answer also has to do with the fact that the question states "MAY". It may very well include anything, but will it?
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